Until recently, corporate crypto exposure was largely seen as too volatile and complex for public companies to consider seriously. However, recent developments have shifted this paradigm, making crypto ownership more viable under U.S. accounting principles, particularly those governed by Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) has adopted rules that enable most qualifying digital assets to be marked to fair value through earnings. Meanwhile, the U.S. Securities and Exchange Commission (SEC) has updated its guidance on safeguarding obligations, allowing U.S.-listed Bitcoin and Ether exchange-traded funds (ETFs) to operate as easily as any conventional fund.
This transition is significant because it signals a shift of crypto asset exposure from the periphery to the center of treasury and investment discussions in corporate boardrooms. Chief Financial Officers (CFOs), audit committees, and boards are now under pressure from analysts and shareholders to consider the inclusion of digital assets in modern capital allocation strategies. Understanding the evolving rules and recognizing the associated risks has become an essential aspect of responsible corporate governance.
Pathways to Corporate Crypto Exposure
Public companies now have two primary methods to gain exposure to crypto assets:
Spot Bitcoin or Ether ETFs: This route offers a straightforward and compliant entry point. By investing in ETFs, companies bypass the complexities of managing digital wallets and private keys, relying instead on familiar fund structures that include daily net asset value (NAV) reporting, audited financials, and broker-based trading. While there are modest fund fees and potential tracking errors, the ease of compliance makes ETFs an attractive option.
- Direct Ownership of Digital Coins: Holding digital assets directly offers greater control over asset management, allowing companies to manage timing, counterparties, and the movement of assets more effectively. However, this approach introduces new challenges. Following the adoption of Accounting Standards Update (ASU) 2023-08, gains and losses from these assets are now reflected in net income, potentially impacting earnings volatility. Companies choosing this route need to ensure robust governance practices, including institutional-grade custody for assets and a clear incident response plan to meet audit requirements.
Accounting and Custodial Framework
Incorporating crypto assets into a firm’s balance sheet requires adherence to several accounting principles aimed at ensuring simplicity and consistency. Under ASU 2023-08, most qualifying digital assets must be measured at fair value, with fluctuations recorded in net income. Companies must maintain detailed disclosures regarding the assets’ fair value calculations, supported by reliable price sources and a well-defined principal-market policy.
The SEC’s Staff Accounting Bulletin (SAB) 122 has refined the safeguarding framework for digital assets held on behalf of clients. Entities must evaluate whether a liability exists and disclose it according to current GAAP. Companies holding assets for their account can concentrate on fair-value processes, the integrity of internal controls, and risk reporting.
Governance and Financial Discipline
A diligent governance framework is critical when confronting these new asset classes. Corporate boards should implement comprehensive treasury policies governing crypto assets, detailing the purpose, limits, and custodians approved to manage these investments. Operations surrounding digital wallets must mirror the rigor of traditional cash management, with dual approvals, thorough documentation, and independent testing procedures in place.
Disclosure practices are also vital in maintaining transparency. Companies must fully disclose potential earnings volatility due to fair-value measurements and operational risks related to custody and cyber threats in their Management’s Discussion and Analysis (MD&A) sections. Material shifts in investment strategy should trigger compliant disclosures across various platforms, ensuring that stakeholders are kept informed.
Navigating Legal and Tax Implications
Organizations must remain vigilant about the Investment Company Act’s “40% test.” If a company accumulates crypto-related investment securities equal to 40% or more of its unconsolidated assets, it could inadvertently be classified as an investment company, bringing additional regulatory scrutiny. Continuous monitoring and meticulous documentation are essential for compliance in this area.
Moreover, tax treatment further complicates the landscape. The IRS has classified crypto as property, necessitating careful planning around the divergent timing of book and tax changes. Companies must track deferred taxes, basis changes, and state-level impacts to maintain compliance and optimize fiscal outcomes.
Planning for Crypto Exposure
Before integrating crypto assets into their portfolios, companies must clarify their rationale for seeking exposure to digital currencies. Setting explicit position limits can guide strategic objectives—be it diversification, a reserve strategy, or another intent. Leadership teams need to weigh the benefits of ETF investments against direct ownership and choose qualified custodians accordingly.
Incorporation of crypto assets should compel businesses to update existing internal controls and disclosure frameworks. Coordination with auditors early in the process can mitigate surprises related to valuation and control. If a firm extends its investment horizons to include securities associated with cryptocurrencies, it must remain alert to the implications of the Investment Company Act and maintain liquidity and tax discipline.
Conclusion
Corporate crypto exposure has reached a stage where it can be undertaken with the due diligence expected of any treasury or investment decision. With established fair-value accounting practices, straightforward access through ETFs, and clear safeguarding protocols, organizations have the tools they need to responsibly incorporate digital assets into their strategies. The success of these initiatives, however, largely depends on strong corporate governance practices, including rigorous controls, board-level oversight, and transparent communication.
As public companies navigate this new frontier, understanding the associated risks and opportunities is crucial. The initial allocation of corporate funds into crypto assets should be treated with the same meticulous planning and documentation as any other financial transaction, ensuring that this innovative asset class is embraced with caution and clarity.
