Crypto assets What Are Crypto assets (Cryptocurrencies)? from an Accounting Point of View. In 2009, the definition of a crypto asset was qui...
What Are Crypto assets (Cryptocurrencies)? from an Accounting Point of View.
In 2009, the definition of a crypto asset was quite simple, with one example: Bitcoin. A lot has happened. We count thousands of crypto assets today. In our opinion, it makes sense to define what it is and sort them into categories.
The objective of this article is to give a clear explanation of what a crypto asset is from the point of view of an accounting professional, not exhaustively.
Also Read Article - What Is a Crypto Digital Asset? Cryptocurrencies Vs Tokens
Different types of crypto assets
Technical fundamentals of crypto assets
Unlimited Crypto Asset Possibilities
Definition of an "asset" from an accounting meaning
Basically, we find assets on one side and liabilities and equity on the other side on the balance sheets. Total assets correspond to the sum of liabilities and equity. An asset is a resource owned by the company that can be tangible or intangible. From an accounting point of view, we distinguish fixed assets from current assets.
Tangible assets are real and measurable, they are physical like inventory. Intangible assets are digital (not physical). They range from bonds, stocks, and digital currencies to intellectual property (trademarks, copyrights, etc.). Trade secrets, training materials and licenses are also intangible assets.
We call some of them fixed assets, especially because they lack liquidity, that is, it is difficult to convert them into cash. They include property, plant and equipment. In contrast, current assets include cash itself and other assets that we can convert to cash in one year.
Definition of a Crypto Asset
A crypto asset and a cryptocurrency have the same accounting definition. Either it emphasizes the crypto asset or the crypto currency. In both cases, they are digital assets, not physical, and they are in the asset part of the balance sheet. Sometimes it is difficult to clearly define what category of assets they are in. We need to understand more.
A crypto asset (cryptocurrency) is part of digital currencies (all electronic money). Digital currencies are intangible electronic money, sometimes regulated, sometimes unregulated.
Among digital currencies, we count cryptocurrencies and virtual currencies. Some characteristics make a currency more cryptographic than a virtual one:
- encryption / cryptography that allows privacy, pseudonymity or anonymity.
- decentralization, avoiding control by a centralized third party, therefore resistant to censorship.
- not regulated or not yet regulated. (The "know your customer" and anti-money laundering rules do not always apply).
- the code guarantees functionalities / features in a public ledger (blockchain). Some examples are mining, stakes, governance, and immutability.
Examples of crypto assets (cryptocurrencies) are bitcoin and ethereum. While examples of digital currencies are Paypal or virtual games money.
Different Types of Crypto Asset
Crypto is more than just Bitcoin. This quick reference guide will help you understand the differences between the various types of crypto assets that currently exist.
Cryptocurrencies are digital currencies that use blockchain technology to encrypt, regulate, and verify the transfer of funds between people. The best known cryptocurrency is Bitcoin (BTC), but there are also thousands of alternative currencies ("altcoins") currently in circulation. They are often used as a store of value or as payment.
Stablecoins are digital currencies that are pegged to an already established currency to reduce the amount of volatility that accompanies cryptocurrencies. Tether (USDT) is a stablecoin backed by the US dollar. Some stablecoins are backed by commodities rather than fiat currency, such as Digix (DGX), which is backed by gold.
Privacy coins are a type of cryptocurrency that includes additional layers of encryption to keep transaction information secret. Privacy coin owners are anonymous and the amounts in their wallets, along with the amounts of coins they have traded, are kept private. Monero and Dash are privacy coins, for example.
Utility tokens are used in the operation of a blockchain service. They are generally designed to serve some kind of purpose within the blockchain and / or give users access to particular services or voting rights. The BNB token of the Binance exchange, for example, was created to handle transaction fees on the exchange. The Basic Attention Token (BAT) was created to help improve the effectiveness of digital advertising through a blockchain-based advertising system.
Security tokens are similar in nature to utility tokens, but are often used in the crowdfunding process of a new cryptocurrency or blockchain project. A security token represents a stake in the project and often comes with an expectation of future earnings. Token holders can receive benefits such as voting rights, profit sharing, and dividends. Because of this, security tokens are subject to certain federal security regulations.
There are many blockchain projects that involve the exchange of digital items, the value of which is determined by rarity. Cryptokitties are digital cats that can be collected and raised on the Ethereum blockchain and are probably the best known crypto collectibles so far. Another example comes from Gods Unchained, a turn-based card game with trading cards that you can own on the Ethereum blockchain.
One way to better understand crypto assets is to learn more about their purpose. Organizations that decide to use crypto assets have specific goals and purposes.
The goals for the creation of crypto assets can have several sources of motivation such as:
- To attract early users and gain international access to financial resources. Thus making the project sustainable.
- use blockchain tech features like immutability. Speed and low fees are key for international money transfers, for example. The goal can also be to prove ownership, digitize the property, or adapt to a specific industry.
For example, one of the rules of accounting is to have immutable invoices, that is, we can only cancel an invoice by asking the issuer to create a credit note, while it is forbidden to simply delete the invoice. In order for this rule to be respected, we must ask the vendor to manually create a credit memo. It is a long and manual process. This leads to believe that Blockchain is an accounting technology since it guarantees immutability by essence.
The value of these crypto assets is key to sustainability, but the environment is volatile. This is why some stablecoins like DAI have been launched successfully (a stablecoin is a cryptocurrency indexed to a FIAT currency such as USD).
The value of each crypto asset depends on the issuing company, media coverage and the secondary market. Some theoretical models for a calculated token value are beginning to emerge.
Some cryptocurrencies are like gold and are quite rare with a limited supply. For example, the Bitcoin code limits the total amount of Bitcoins created. Other criteria have effects on the value of cryptocurrencies, such as quantity, liquidity, participation, and use.
In choosing the specifics, the organization creating the crypto asset might have some responsibility in defining the category it fits into.
The purpose of crypto assets like Bitcoin was "decentralized electronic money." Some emerging crypto assets have proven to be quite innovative. Those changes challenge our understanding from an accounting point of view. Are they a store of value, electronic money or an open source technology? Let's think differently. It could be nice to be a store of value and electronic money and an open source technology at the same time. Or even evolving from one to another over time.
Technical Fundamentals of Crypto Assets, in a Few Words
It is important to understand the technology behind crypto assets. Most of them have similar technical characteristics.
The biggest point in common is the use of blockchain technology.
Blockchain technology is behind all cryptocurrencies. This can make the transactions public. Being public does not mean that we can identify payers and beneficiaries. In Ethereum, for example, we can only identify your address. Transactions are pseudonymous. Also, being on a blockchain means that decentralized technology is powering the cryptocurrency.
Those blockchains use cryptography as their encryption method. They push cryptocurrencies based on transparent and open source code.
Unlimited Possibilities of Crypto Assets
More than ten years ago, crypto assets did not exist. And today we are still trying to define what they are. A crypto asset can fit into many categories at the same time, such as platforms or means of payment.
This is a challenge for companies and accountants.
We go through breakthrough crypto assets and bigger revolutions are coming. This is an ongoing definition process as many new ones are arriving. We will need common guidance and acceptance.
Article Web Title - Crypto Assets? Different Types of Crypto Digital Asset