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SOME BASICS FOR ACCOUNTING FOR CRYPTOCURRENCIES

Luis-Cardona

Luis Cardona R
Of Counsel

 

This LEĜA Perspectives aims at a preliminary analysis of the principles that should govern the accounting of cryptocurrencies under the accounting standards applicable in Venezuela.

 I. Basic definitions

Accounting analysis of cryptocurrencies requires the precision of a few basic concepts.

 1. Cryptocurrency

 Three definitions can help us to specify what is meant by cryptocurrency: 

  • “A digital currency that employs encryption techniques to regulate the generation of units of currency and verify the transfer of funds, and that operates independently of a central bank” (Oxford Dictionary).
  • “A digital currency produced by a public network rather than any government, which uses cryptography to ensure that payments are sent and received securely” (Cambridge Dictionary).
  • The digital newspaper specializing in Bitcoin Coindesk defines the term cryptocurrency as: “A form of currency based solely on mathematics. Instead of fiat currency, which is printed, a cryptocurrency is produced by solving mathematical problems based on cryptography.”

2. Initial Cryptocurrency Offering (ICO) 

An Initial Coin Offering (ICO) is a financing mechanism that allows a project or company to raise funds in highly liquid cryptocurrencies, such as Bitcoin or Ethereum, and currencies such as dollars or euros, through the mass sale of a new cryptoasset. It is a use case of crowdfunding, which is a method of financing a project or company by raising many small amounts of money from a large number of people, typically over the Internet.

In an ICO, the money-seeking project issues a certain amount of cryptoassets or tokens on top of a previously existing blockchain platform, such as Bitcoin, Ethereum or Waves, and delivers them to investors in exchange for cryptocurrencies or, in rare cases, fiat money such as the dollar or euro.

3. Blockchain

“Blockchain is a distributed database that allows the secure, transparent, and unalterable registration of digital transactions, without the need for intermediaries, through the use of cryptography and consensus between nodes” (Marín Pérez, Claudia (2022). “Blockchain Technology: Origin, Operation and Uses”. University of Zaragoza).

II. How Blockchain Works in Cryptocurrency Transactions

Satoshi Nakamoto (“Bitcoin: A Peer-to-Peer Electronic Cash System” – 2008) defines electronic currency as “a chain of digital signatures, where each owner transfers the currency to the next by digitally signing a hash of the previous transaction and the public key of the next owner, and adding these elements to the end of the coin. The receiver can verify the signatures to verify the chain of ownership.” Hashing is a cryptographic function that converts any input (such as a text, file, or number) into a string of characters of fixed length, uniquely representing that input.

III. International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) applicable to accounting records of transactions carried out with cryptocurrencies

1. Is a cryptocurrency an asset?

The definition of an asset within the Conceptual Framework of the International Accounting Standard Board (IASB) is:

“A current economic resource controlled by the Entity, as a result of past events.”

 “An economic resource is a right that has the potential to produce economic benefits.”

In this sense, cryptocurrencies can be considered as an asset, since:

  • Current resource controlled by the entity: The entity has dominion over them through the use of private keys, which allows you to manage them freely.
  • As a result of past events: Your acquisition comes from previous events, such as purchases, trades, or mining processes.
  • They have the potential to produce economic benefits: they have the capacity to generate future economic benefits, as they can be used as a means of payment, exchanged or sold.

2. Are cryptocurrencies cash or equivalents, in accordance with IAS 7 “Statement of Cash Flows”? Or a financial asset in accordance with IAS 32 “Financial Instruments”?

IAS 7 defines cash as: “that which relates to the resources that the company maintains with immediate availability, such as cash and balances in financial institutions”. Paragraph AG3 of IAS 32 “Financial Instruments” states that cash is a financial asset because it represents the medium of exchange and, therefore, is the basis on which all transactions are measured and recognized in the financial statements.

In that sense, the IASB’s IFRS Interpretation Committee notes that some cryptocurrencies can be used in exchange for particular goods or services. However, the Committee noted that it is not aware of any cryptocurrency being used as a medium of exchange and as a monetary unit in the pricing of goods or services, such that it is the basis on which all transactions are measured and recognized in financial statements. In addition, cash is issued by central banks and backed by governments, which is not the case with cryptocurrencies. Consequently, the Committee concluded that a cryptocurrency holding is not effective, because cryptocurrencies currently do not have the characteristics of cash.

In addition to the above, paragraph 11 of IAS 32 defines a financial asset. In summary, a financial asset is any asset that is: (a) cash; (b) an equity instrument of another entity; (c) a contractual right to receive cash or other financial assets from another entity; (d) a contractual right to exchange financial assets or financial liabilities with another entity on particular terms; or (e) a particular contract that will be or may be terminated in the entity’s own equity instruments. That said, the IFRS Interpretation Committee concluded that a cryptocurrency holding is not a financial asset. This is because a cryptocurrency is not cash, nor is it an equity instrument of another entity, does not give rise to a contractual right for the holder, and is not a contract that is or can be resolved in the holder’s own equity instruments.

3. Are cryptocurrencies intangible assets, in accordance with IAS 38 “Intangible Assets”? Or inventories according to IAS 2 “Inventories”?

An intangible asset is an identifiable asset, of a non-monetary nature and without physical appearance, in accordance with the provisions of IAS 38. Now let’s discuss this definition:

Identifiable: IAS 38 states that an asset is identifiable if:

a.     It is separable, i.e., it may be separated or divided from the entity and sold, transferred, licensed, leased, or exchanged, individually or in conjunction with a related contact, identifiable asset, or liability, regardless of whether the entity intends to do so; or

b.    It arises from contractual or other legal rights, regardless of whether those rights are transferable or severable from the entity or from other rights and obligations

Cryptocurrency holdings can be traded on an exchange or in peer-to-peer (P2P) transactions and therefore meet this part of the definition.
Non-monetary asset: Cryptocurrency can be traded on an exchange or in peer-to-peer transactions and therefore an entity can expect an influx of economic benefits from them that meet the general definition of an asset in IAS 38.
No substance (physical appearance): Cryptocurrencies are a form of digital money, so they lack substance or physical appearance

Based on the above, the classification of cryptocurrencies as an intangible asset seems to be the most appropriate in general terms. However, the optimal classification will depend fundamentally on the intention of use of the entity that owns them. This consequently leads to the potential presentation of cryptocurrencies as inventories, in accordance with the provisions of IAS 2 “inventories”.

To consider classification as inventories in accordance with IAS 2, it is essential to consider the following aspects:

IAS 2: Recognition and measurement of inventories IAS 2: Commodities (brokers/traders)
Inventories should be recognized and measured at the lowest value between cost and net realizable value. The measurement of these inventories must be done at fair value, less the cost of being sold. (changes in fair value must be recognized in the statement of comprehensive income)

IAS/IFRS (2025) defines fair value as “The price that would be received for selling an asset, or that would be paid to transfer a liability, in an orderly transaction between market participants at the measurement date”.

Based on the above, the classification of cryptocurrencies as inventories, IAS 2 may be applied, but under some limited circumstances, which involve a business model whereby cryptocurrencies are acquired for the purpose of being sold on a short-term basis, and which generate profits caused by fluctuations in the price or profit margin of the entity (brokerage firms,  brokers/traders, etc.), i.e., the registration of cryptocurrencies as inventories, under IAS 2 for entities engaged in stock market activities (brokerage firms, securities brokerage firms, brokers/traders) appears to be appropriate.

4. And in accordance with the accounting principles generally accepted in Venezuela (VEN NIF), what would be the accounting treatment of cryptocurrencies?

The Venezuelan accounting framework, known as VEN-NIF, handles the accounting of cryptocurrencies (or crypto assets) in a distinctive way. Instead of following the traditional IFRS classification, which establishes its accounting record as Inventory or Intangible Asset according to the entity’s intentions, Venezuela has its own regulations.

This specific regulation is the VEN-NIF Application Bulletin No. 12 (BA VEN-NIF 12) “Holding of Own Cryptoassets”, published by the Federation of Public Accountants (FCCPV). This bulletin creates a single, separate accounting category for these digital assets, meaning they are not mixed with other items in the financial statements. The BA VEN NIF 12 bulletin establishes that:

  • The entity shall recognise in its financial statements the holding of a cryptoasset when it obtains control of it through a selected storage and management mechanism, and expects future economic benefits from it.
  • The entity has control of the cryptoasset when it is in a wallet or other computer platform, managed directly or indirectly by the entity and that allows it to carry out transactions with said cryptoasset.
  • Cryptoassets will be derecognized when the entity transfers them, loses control of the wallet, does not have the capacity to generate future economic benefits, or fair value (VR) cannot be measured.

After their initial recognition, the cryptoassets will be measured at the VR. Any increase with respect to the carrying amount will be recognized in other comprehensive income (ORI), as well as any decrease, will be recognized in the profit or loss of the period in the statement of comprehensive income (ERI) under the heading “Gains and Losses on Holdings of Cryptoassets”, after deduction of any increase in the ORI.  The Bulletin requires that the determination of the VR be either level 1 (data coming directly from the market), or level 2 (input data that is observable, i.e. corroborable, but not direct quoted prices of identical assets). If this determination is not possible, the VR of the cryptoasset should be considered to be equal to zero (0).

Cryptoassets, because they are measured at the active market value on the date on which they are reported, will not be subject to restatement, since said value represents a current cost (amount).

5. What information must be disclosed in the financial statements presented in accordance with IFRS/IAS in accordance with VEN NIF?

IFRS/IAS COME ON NIF 12
•       Cryptoassets must be classified as current or non-current assets according to the temporality of the holding planned by the entity.

•       All disclosure requirements set out in IAS 2 (Inventories) and IAS 38 (Intangible Assets) apply. However, due to the attributes of cryptocurrencies, such disclosure requirements may need to be expanded.

•     IAS 1 (Presentation of Financial Statements) requires the disclosure of information about material accounting policies and judgments made in the application of accounting policies that have the most material effect on the amounts recognized in the financial statements. The entity must sufficiently disclose the accounting policies referring to operations carried out with cryptocurrencies (use, estimates of future profits, etc.)

 •       Cryptoassets must be classified as current or non-current assets according to the temporality of the holding planned by the entity.

•       All disclosure requirements established by IFRS/IAS.

•       Cryptoassets must be presented in the statement of financial position (ESF), in a separate item from the other elements.

•       In the ERI under the heading “Gains and Losses from Holding Cryptoassets” it must be presented separately, as in the ORI.

•       The entity will disclose: a) the types of Cryptoassets it controls; b) the nature of the activities relating to each group of Cryptoassets; (c) the source of information based on the recognised measurement; d) a reconciliation of changes in the carrying amount of the Cryptoasset, between the beginning and the end of the period (it must include results due to changes in market value, acquisitions, divestitures and variations due to exchanges between Cryptoassets of different nature).

Contacts:

LEĜA Abogados
  infolaw@lega.law
  +58 (212) 277.22.00
  www.lega.law

Luis-Cardona


Luis Cardona R.
lcardona@lega.law
+58 (414) 311-3818

 

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