Abstract
Recent advances in the sphere of blockchain technology have enabled the digitization of value.
This includes the development of crypto tokens, which represent a radically new economic
phenomenon. The objective of financial reporting is to provide users of financial statements with
information that is useful in helping them to make decisions by enhancing their understanding of
this phenomenon. No dedicated accounting standard exists to guide the reporting of crypto
tokens, and application of the current standards appears to result in reporting outcomes that are
nonsensical or do not fully capture the true nature and risks associated with these instruments.
As such, this study adopts a doctrinal approach to explore the accounting treatment of different
types of crypto tokens through a conceptual lens. Exploring the true nature of these tokens, and
assessing how they should be accounted for, is important for the discipline of accounting to
remain relevant. The research explores the nature of payment, utility, security, and asset-based
tokens, and applies the Conceptual Framework to test if the fundamental principles of IFRS
provide sufficient guidance to help reporting entities assess the identification, recognition,
measurement and presentation and disclosure of each class of token.
Approaching crypto tokens from a conceptual angle suggests that their accounting treatment
should be driven by their nature as this influences the benefits that can be unlocked from
different types of tokens, and the potential risks they expose the token holder to. Payment tokens
are first-generation tokens regarded as digital representations of value, similar in nature to
speculative financial instruments. Second-generation tokens comprise utility tokens, security
tokens and asset tokens. They are less risky than first-generation tokens because they hold a
degree of functionality supported by real-world commercial application.
To be identified as an asset, a token must be embedded with a right capable of generating
economic value. Payment tokens permit the exchange of digital value, whilst second-generation
tokens hold possible commercial or investment value. Utility tokens enable the holder to access
digitized goods or services from the token issuer on terms that are favourable to the market.
Security tokens entitle the holder to a share of ownership in a blockchain network. Asset tokens
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permit fractional ownership or limited usage of a real-world asset. The definitional features of
control and identification of the past event are explored in the context of the broader blockchain
ecosystem. Each class of token meets the criteria to be identified as an asset.
The Framework endorses performance as a trigger for recognition. Nevertheless, when an
element exposes the reporting entity to risk, earlier recognition may be required. If a token
establishes a performance-based executory contract between the holder and the issuer, it is
recognized in line with the extent of performance rendered by either of the contracting parties.
Only if the holder is exposed to an abnormal degree of risk, earlier recognition is permitted.
Measurement is the quantification of potential economic benefits embedded in an asset. Holders
of crypto assets must establish the measurement objective associated with a token to assess how
they seek to unlock its value. Tokens held for earning direct gains through sale or investment
growth are recognized on the basis of risk and tend to favour current value measurement. Tokens
applied indirectly in the business operations of the reporting entity establish performance-based
contracts that favour measurement at historical cost.
The impact of a token’s financial performance should be presented in profit or loss and classified
according to the holder’s intent and the tokens nature as a speculative, investment or operating
asset. Disclosures should seek to enhance the user’s understanding of crypto tokens by explaining
their nature and risks and address other uncertainties of a general nature.
These research findings conclude that the principles outlined in the Framework are sufficiently
robust to help guide the accounting treatment of different classes of crypto tokens. This study is
significant because it not only presents a methodical approach that explores the nature of
different classes of crypto tokens, and guides how they should be conceptualized, but also affirms
the relevance of the Framework in assisting to solve accounting challenges of a topical nature.
The research also notes that application of the current IFRS statements towards accounting for
crypto tokens may result in outcomes that do not always accord with the principles set out in the
Framework. It emphasizes the need for the IASB to embark on a dedicated standard-setting
project concerning the accounting treatment of crypto tokens.