Accounting for mined and non- mined cryptocurrencies: A critical analysis

Abstract

Cryptocurrencies have garnered significant attention from all over the world over the last
few years. In simple words, cryptocurrency is a peer to peer digital currency that uses cryptography
as security. The increases usage of cryptocurrency raises a new issue which is related to the financial
reporting implications for those who are receiving, hold, issue or trade-in them. At this moment,
there is no specific accounting guidance for the cryptocurrency. The paper elaborates different
aspects of cryptocurrencies, starting with the definition and features of cryptocurrency. Then, this
paper also discusses on mining and non-mining process, issues and challenges, advantages and
governance of cryptocurrency. In addition, the paper covered issues related to accounting for mined
and non-mined cryptocurrency. It was concluded that it is not easy to set accounting guidance for
cryptocurrency as the technology is still evolving. In addition, due to the diversity of cryptocurrency
in term of its features, making it is more difficult to draw general conclusions on the accounting
guidance. Cryptocurrency is worth paying attention to as they have the potential to revolutionise the
global financial ecosystem but we also have to be ready to face the challenges and prepare for a
changed future.

Keywords: Cryptocurrency, IFRS, mining, accounting.

1. INTRODUCTION

Generally, the financial market has experienced huge development throughout the years. The
exchange instruments that have been used also evolve in accordance with the market needs. From
the era of bater to gold and silver until right now fiat money is considered as the main financial
instruments used in the global financial market. Payment systems have evolved. People tend to use
fewer notes and coins. The emergence of cryptocurrency has more or less impact on the fiat money
market. The impact may be positive, on the other hand, it may be negative. In addition, the
invention of blockchain technology has drastically changed the perception of how the monetary
system can be structured and operates (Nakamoto, 2008).

There have been numerous endeavours at making computerised money amid the 90s tech boom,
with systems like Flooz, Beenz and DigiCash developing on the showcase but definitely failing (Jani,
2018). Then in early 2009, the first decentralised cryptocurrency was launched by
pseudonymous Satoshi Nakamoto which is Bitcoin (Dourado and Brito, 2014). Since then, there are
thousands of cryptocurrencies have been created using the same innovations but changing some of
the specific features of their governing algorithm such as Ethereum, Ripple and Tether.

The first part of this paper is to explain the background of cryptocurrency in terms of the definition,
features, mining process and non-mining cryptocurrency. In the second part, the focus will be on the
advantages and disadvantages and Shariah perspective on cryptocurrency. At the end of this part,
the accounting guidance from IFRS and tax implication will be elaborated.

2. BRIEF BACKGROUND OF CRYPTOCURRENCY

2.1 Definition

Cryptocurrency is a digital token that exists within a specific cryptocurrency system which
generally consists of a peer to peer network, a consensus mechanism, cryptography and public key
infrastructure (Hileman and Rauchs, 2017).

2.2 Features

One of the primary issues that any payment network should solve is the double spending
problem. It could be a false procedure of spending the same amount twice. The only way to
overcome this problem is by using a trusted third party intermediary. This trusted third party will
keep all the balances and transactions records. Thus, this technique will continuously involve an
authority to control of your personal details and funds. In 2008, Satoshi Nakamoto announced a
solution to solve this double spending problem without using third parties. Bitcoin implements the
confirmation mechanism and maintain universal ledger system to overcome this double spending
problem. The blockchain is an open record ledger of all transactions which are accessible to
everyone. Hence, everybody within the network can see every transaction. Every few minutes, the
information from blocks is added to the ledger and all nodes on the network maintain a copy of the
blockchain ledger.

Each transaction could be a record that comprises of the sender’s and recipient’s public keys
(wallet addresses) and the number of coins exchanged. The exchange has to be signed off by the
sender with their private key as well. All of this is just basic cryptography. In the end, the transaction
is broadcasted within the network, but it should to be confirmed first. Inside a cryptocurrency
network, as it, only miners can verify the transaction by solving the cryptographic puzzle. They take
transactions, mark them as valid and spread them across the network. Next, each node of the
network will be added to its database. Once the exchange is affirmed it gets to be unforgeable and
irreversible and a miner will get a token of cryptocurrency as the reward added with the transactions
fees.

Basically, any cryptocurrency network is based on the agreement of all the members related
to the legitimacy of balances and transactions. If nodes of the network disagree on a single balance,
the system will automatically break. However, rules that are pre-built and programmed into the
network will avoid this from happening.

The information and details regarding the identities of the buyer and seller are protected by
high level encryption. This encryption also protects the ledger from being interfered by outside
sources. The best thing about this block is it is not maintained or controlled by any central authority.
Instead, the whole peer to peer network will take place as the trusted third party by contributing
their computing capacity to reconcile and maintain the blockchain ledger.

2.3 Initial coin offering (ICO)

Initial coin offering is somewhat similar to an initial public offering which investors purchase
shares of a company. ICO is a fundraising mechanism that typically comes when a company plans to
launch a new product. The company will create its own virtual currency and issues newly created
coins or tokens (Delloite, 2018). The main issue on ICO is many people view it as unregulated
securities that allow founders to raise an unjustified amount of capital. On the other hand, some
opines that it is an innovation in the traditional venture funding model.

In 2013, Ripple pre-mined 1 billion XRP tokens and sold them to the investors in exchange
for fiat money or bitcoin. For ethereum case, a total of $ 18 million is raised in early 2014 via Initial
Coin Offering. Other than that, the amount of money raised through ICOs over the last two years is
astonishing which is in 2017, ICOs successfully raised a total of $5.6 billion.

One of the most important things in ICOs is whitepaper. The whitepaper is a concisely
written piece of documentation which presents the problem that the project wants to solve. The
method to solve the problems also will be written in the document. The potential investors will look
and read the white paper in order to make the decision whether to invest or not in the project.

There are some parties that mistreating this ICOs. Loads of scammer have entered this space
to make illegal activities such as fraud and hacking. Their modus operandi is they will create a bogus
white paper to make their projects seem important and good. Thus, some offerings are described
ICOs is one of the attempt to avoid regulations that are created to protect investors. A careful
evaluation of the ICOs terms and considering the legal rights to be included to tokens is necessary
and important to avoid such problem.
2.4 Cryptocurrency industry

Cryptocurrency world does not only consist of cryptocurrency. Mining, wallets, exchanges
and payments are also involved in this cryptocurrency ecosystem. At least 1,876 people work full
time in the cryptocurrency industry. Most full-time employees of the cryptocurrency industry are
employed by companies based in Asia-Pacific, followed closely by North America (Hileman and
Rauchs, 2017).

Exchanges play a vital role in the cryptocurrency ecosystem by providing a marketplace for
customers to buy and sell cryptocurrencies for other forms of money or assets. In early 2010, the
exchange's services started to develop as a project to enable early users to trade bitcoin and
establish a market price. However, exchanges are the favourite spot for hackers as these exchanges
control customers’ private keys. The statistic shows 73% of exchanges control customers’ private key
(Hileman and Rauchs, 2017).

Next, wallets is another important component in the cryptocurrency economy. Generally,

the wallet is a software program that is used to securely store, send and receive cryptocurrencies
through the management of private and public cryptographic keys (Dourado and Brito, 2014).
Mostly all these wallets are run by volunteer developers as the reference implementation wallet is
not practical for many users.

As conclusion, the cryptocurrency ecosystem consists of a various set of actors, builds

interfaces between public blockchain and various economic sectors. All these services add significant
value and big impact on cryptocurrencies world as they make the technology efficient and can be
used all around the globe.

2.5 Comparison between fiat money and cryptocurrency

Some people consider cryptocurrency as the new competitor to fiat money as the
appearance of cryptocurrency especially Bitcoin has more or less give impact on the fiat money
market. In 2013, when Bitcoin’s value drastically increase, people tend to purchase Bitcoins.

The table below shows a comparison between fiat money and cryptocurrency. Both have
their own strengths and weaknesses. At this moment, coexistence is the best consequence of the
battle between these two completely different kinds of currencies.
 Cryptocurrencies Not Cryptocurrencies
Usual Fiat Currencies Backed by Real Assets backed by Real
Assets, like Gold
Asset Backed? No No Yes
Examples National currencies Bitcoin OneGram
notes, coins, e-money.
Issuer Central authorities like Issued by the system Private Issuers. Not
central banks and to private individuals issued by central
commercial banks for performing some authorities like central
task. Not issued by banks but the issuer is
central authorities. known.
Secure from Low High High
counterfeit?
Asset or liability Liability of the issuer Not a liability of Real asset
anyone. A new asset
class – digital asset
Regulator Central bank No regulator No regulator but
members abide by
rules commonly set or
by the operator
Guarantor Government is the No ownership of the Guaranteed by system
guardian and system and no owners or operator.
protector of the guarantor. Highly risky There are system
money and monetary and uncertain. ownership and rules.
system
Source: (Meera, 2018, page 5)

2.6 Mining process

Since cryptocurrency is a decentralised network which has no authority to control all the
activities, imagine if somebody makes thousands of peers and spread fake transactions. The system
will break instantly. Thus, cryptocurrency needs a mechanism to avoid one party from mistreating it.
Mining is purposely designed to be resource-intensive and difficult so that the number of blocks
found each day by miners remains steady. Cryptocurrency mining, or crypto mining, is the process in
which transactions for various forms of cryptocurrency are verified and added to the blockchain
public ledger of past transactions. Mining has grown from a simple hobby by individual using their
own mining equipment into a capital intensive industry such as providing mining hardware
manufacturing, cloud mining services and remote hosting services. The miners will compete with
other crypto miners to solve the complicated mathematical problems with cryptographic hash
functions that are related to a block containing the transaction data in the mining process. Miners
play a vital role in this cryptocurrency system as they provide the necessary computing power to
secure a blockchain by computing vast numbers of hashes to find a valid block.

Cryptocurrency mining resembles the mining of other commodities because it requires

effort and it is accessible to anyone who wishes to take part. The first crypto miners succeed to crack
the code will be rewarded with a token of cryptocurrency in return for the service provided.
Furthermore, the miner is awarded the fees paid by users sending transactions. The fee is an
encouragement for the miner to include the transaction in their block. In the future, as the number
of new bitcoins miners are allowed to create in each block declines, the fees will be an important
percentage of mining income.

In order to get started mining, crypto miners need computer hardware with a specialised
graphical processing unit (GPU) chip or application-specific integrated circuit (ASIC), sufficient
cooling for the hardware, fast internet connection, a valid cryptocurrency mining software package,
and membership in both an online cryptocurrency exchange and an online mining pool.

2010 marks the emergence of the first cryptocurrency mining pools which distribute rewards
across pool participants based on the share of computing power contributed to the pool by each
miner. Currently, mining has been a competitive industry due to the frequent entry of new mining
pools and the exit of previously successful pools. Nearly three-quarters of mining pools are based in
just two countries which are China and United States. China ranked at the first place with 58% of
mining pools followed by United States with 16% (Hileman and Rauchs, 2017)

2.7 Non-mining cryptocurrency

Besides mining cryptocurrency, there is non-mining cryptocurrency in this cryptocurrency

ecosystem. Ripple, IOTA, Cardano and Stellar are the example of non-mineable cryptocurrency
which is only bought rather than mined. What is the difference between these two
cryptocurrencies? Non-mined cryptocurrency operates on a model known as proof of stake. In proof
of stake system, a validator must prove ownership of a certain amount of coins in order to
participate in transaction validation. This type of algorithm does not require computers and high
supply of electricity to solve and break the complex codes. This means the cost of this method is
lower compared to mining cryptocurrency. Due to the limited supply of non-mineable
cryptocurrency, the price of the cryptocurrency is high whilst the cost is low. Thus, the stakeholder
will receive the aggregate transaction fees from a block of transactions as the reward. In the PoS
system, the ownership of a cryptocurrency is needed as it is considered as the transaction proof.
People can buy the non-mining cryptocurrency and hold it for a longer time because it can increase
the chances to be chosen to validate a block of transactions.

3. ADVANTAGES OF CRYPTOCURRENCY

Lower transaction fees: On 13 February 2019, the bitcoin transaction fees is 0.30 USD while if you
want to transfer $ 100 of value with a credit card will cost $ 3.37. This shows cryptocurrency has
lower transaction fees compared to other facilities such as bank. In addition, the fees are not based
on the amount transferred, but generally on the transaction size measured in bytes. This means a
multi-million dollar transaction can be transferred for the same fee as a $1 transaction (Hileman and
Rauchs, 2017).

No boundaries: The cryptocurrency systems have a global reach and are not bound to a particular
location or jurisdiction. The peer to peer network

Thus, it can be used to transfer funds within a short time which ranging from seconds to several
minutes depending on various factors.

Decentralisation: Cryptocurrency is not governed by any authority or issued by the central bank.
Cryptocurrency system uses public decentralised blockchain networks that will be distributed to all
participants in the network. This means there are not directly under the control of a single
organisation. The system will still operate even though some part of the network goes offline.

Transparency: The cryptocurrency relies on public decentralised blockchain networks which are not
directly under the control of a single organisation. Transactions are recorded on a public ledger that
is shared between network participants. Each node on the network will have the full copy of the
historical ledger. All the transactions will be encrypted and cannot be changed after the mining
process has validated the block of transactions.

Anonymity: Cryptocurrency is completely anonymous and transparent. An individual can create as

many as number of bitcoin addresses without providing their personal information. In addition, all
information about the transaction in the bitcoin network will be shared especially regarding method
and time but there is no data about the sender or recipient of the coins. The evidence is simple, until
this moment, everyone cannot figure out who is Satoshi Nakamoto because he or she is hidden
behind the pseudonym.

No chances to use personal data for fraud: If we are using a credit card for our daily transaction, the
websites always required the customer to enter personal information such as card number,
expiration date and code. In addition, credit cards are easily been stolen. Some companies will sell
our data to other parties for marketing purposes. Cryptocurrency specifically bitcoin does not
require disclosure of any personal data. The system uses two keys which is a public and private key.
The public one is available to everyone whilst the private key is confidential to the owner. For all the
transactions, the owner needs to sign by interacting private keys and apply a mathematical function.
This step is created as evidence that the transaction is performed by the owner.

4. MARKET CAPITALISATION OF CRYPTOCURRENCY

The cryptocurrency industry is rapidly growing into a competitive digital economy. As for January
31 2019, there are 2062 cryptocurrencies in circulation. Moreover, the market capitalisation of all
the cryptocurrencies is $115,457,912,142 i.e $115 Billion and 24 hours volume was $18,152,864,471
i.e $18 billion.

Figure 1: Total market capitalisation of cryptocurrency on 31 January 2019

Source: www. coinmarketcap.com

 As for January 31 2019, Bitcoin has maximum dominance in the cryptocurrency market with
around 52.69% market share and market capitalisation $ 60,846,319,680. Although bitcoin remains
the dominant cryptocurrency in terms of market capitalisation, other cryptocurrencies are
increasingly cutting into bitcoin’s dominant market capitalisation share.

Source: www. coinmarketcap.com

5. ISSUES AND CHALLENGES

Price manipulation: Excessive volatility is the biggest issue in the cryptocurrency market. The prices
of cryptocurrencies on exchange platforms rise and fall drastically over a short period of time. The
volatility of the market is considered high when a tradable asset can drop by as much as 49 per cent
in less than 24 hours. One of the biggest reasons for the excessive volatility in the market due to the
activities of “whales”.

Whales are high net worth individuals that put a large amount of their funds in
cryptocurrencies. They are able to swing the market by manipulating the price of cryptocurrency.
The problem with this commonly occurring situation is that the whales can increase the price
without actually investing in the market. The smaller traders are actually have made the actual
trades which help to boost the price of the cryptocurrency. Once the price is at a level that favours
the whales, they can amend their buy and sell walls, trade in on the price spike and once they do so,
the price of the cryptocurrency falls drastically. This continuous cycle will only benefit the whales.

The absence of position price limits or fees on many cryptocurrency exchange platforms is
one of the biggest factors that contribute to this sort of asset price manipulation. If suitable limits or
fees is applies, it will discourage the movement of large buy and sell market positions.

In addition, its value as a currency can only lie on its usefulness as a medium of exchange
since cryptocurrency is not asset-backed. Moreover, the transactions of cryptocurrency are really
depended on the network and this is one of the factors that contribute to the volatility of
cryptocurrency prices so far because the network is not responsive to changes in supply and
demand. Cryptocurrency is always been more volatile compared to fiat money.

Security threats: As we know that all the transactions of cryptocurrencies are really depended on
the online network. The chances of hacking cryptocurrency system are high. For instance, hackers
and malicious users can create fake or steal virtual currency as much as they like if they manage to
break the security system. In 2016, the average cost of a data breach reached $ 4 million. Malicious
or criminal attacks caused 48% of all violations, and the average cost per record to resolve such an
attack was $170 (Ponemon Institute, 2016).

Technological risks: Computational complexity and high energy consumption of crypto mining are
some of the proofs of technological limitations of cryptocurrencies. This computational complexity
may work in the opposite and create potential risks to the asset class under the premise that
complex system fails in complex methods. For this, investors should be aware of technological risks
and false promises of decentralisation as not all blockchains are created equally in term of the
cryptography.

Lack of governance: Lack of coordination and clarity on regulation for cryptocurrency can create a
big problem. In addition, cryptocurrency applies an anonymous system. Some people are not afraid
to mistreat because there is no law or act that can sue them. Cryptocurrency also always been
related to scam and funding terrorism. All of these things happen due to lack of governance and
regulation on cryptocurrency.

Lack of merchants accepting digital money: The reality is the trust towards digital money is still low
compared to fiat money especially in the daily transaction. Even though cryptocurrency is trending
but still companies and organisations are reluctant to use it for their business purposes. There are
two possible reasons for that which is the first one is not willing to take any risk with the fluctuating
price. Secondly, they still don’t see the benefits of using cryptocurrencies for their business.
 6. GOVERNANCE

Japan (friendly): Japan is the world’s biggest market for Bitcoin and other digital currencies and has
the most progressive regulatory for cryptocurrencies. In April 2017, Japan recognises
cryptocurrencies as legal tender under the Payment Service Act. In December 2017, the National Tax
Agency ruled that the cryptocurrencies are subjected to be taxed at rated 15% - 55%. In addition,
gains on cryptocurrencies should be categorised as ‘miscellaneous income’. Exchanges are legal in
Japan but after a series of high profile hacks including in January 2018, hackers stole $534 million
worth of NEM due to poor cybersecurity from Coincheck, one of the cryptocurrency exchanges in
Japan (Jani,2018). In response to the security issue, Japan’s Financial Services Agency has taken an
action to regulate trading and exchanges amendments to the Payment Services Act that require
cryptocurrency exchanges to be registered with FSA in order to operate.

Singapore (friendly): Singapore has been seen as one of the crypto-friendly places in the world.
Cryptocurrency exchanges and trading are legal in Singapore but adopting cryptocurrency as legal
tender is something that has yet to take place. Besides, Singapore’s tax authority considered the
digital tokens as ‘goods’ and so the Goods and Services Tax applies. However, in January 2018, the
Monetary Authority of Singapore decided to warn the public of the risks of cryptocurrency
speculation in a press release. Sopnendu Mohanty, MAS FinTech chief, suggested that advance
legislative steps must be enforced in order for cryptocurrencies to continue to grow. Money
laundering, funding terrorism, scam or other financial crimes are amongst MAS’ concerns for the
cryptocurrency. In March 2018, it was reported that the financial authority was working on more
robust cryptocurrency regulations specifically to protect investors. However, ICO’s that are not
structured as securities will only be subject to anti-fraud and anti-terrorism legislation.

Britain (neutral): Britain has yet set any regulations regarding cryptocurrency as the government opt
for the wait and see approach. Cryptocurrencies are not considered as legal tender and exchanges
have registration requirements in Britain. Generally, in United Kingdom, the cryptocurrency
exchanges need to be registered with the Financial Conduct Authority (FCA) and any crypto-related
activities fall under existing financial regulations for derivatives require authorisation. In February
2018, Mark Carney, Bank of England Governor, revealed that the FCA is working with the BOE and
UK Treasury to develop a strategy for dealing with cryptocurrency risks such as price volatility and
cybercrimes, the potential technological and economic benefits and how this digital tokens can
disrupt traditional economics.
South Korea (neutral): South Korea regulatory authorities shows no statute or guidance on how
cryptocurrency would be classified under Korean law. In June 2017, the Financial Supervisory Service
(FSS) released their views on cryptocurrencies which are the digital tokens are not considered as fiat
money, prepaid electronic means and financial investment instrument (Jani, 2018). Based on recent
events, cryptocurrency in South Korea is still a grey area as they don’t consider it as neither currency
nor financial assets. In addition, the cryptocurrency transactions are currently tax free.
Cryptocurrency exchanges in South Korea are strict and must be registered with the Financial
Supervisory Service. In 2018, the government decided to prohibit the use of anonymous accounts in
cryptocurrency trading and also banned local financial institutes from hosting trades of Bitcoin
Futures.

China (Hostile): China has a global reputation for harsh cryptocurrency regulations. In 2013, the
People’s Bank of China banned financial institutions from handling Bitcoin. In 2017, China went
further by banning ICOs and domestic cryptocurrency transaction. As the result, causing a large
overall downtrend in the cryptocurrency market. China does not consider cryptocurrencies as a legal
tender and cryptocurrency exchanges are illegal. In January 2018, there is news circulating from a
leaked PBOC memo proposed that Bitcoin mining operations would be banned.

7. SHARIAH PERSPECTIVE ON CRYPTOCURRENCY

Muslim investors are not excluded to take advantage of involving in cryptocurrency. Thus,
recently Shariah legitimacy of cryptocurrency is the most common question raised at any forums or
conferences.

There are three fundamentals things that Shariah scholars need to consider before they give
fatwa. Firstly, the nature of the underlying instruments which means is cryptocurrency considered as
wealth (maal). For cryptocurrency to be considered as valuable wealth or property, the jurists state
that it must be halal which is it is considered as a store of value through societal consensus
(Mahomed and Ramadili, 2017). Next, the cryptocurrency needs to be tested under the second and
third filter which are Shariah permissibility and fulfilling the objectives of the Shariah (Maqasid
Shariah).
The table below is the summary of Shariah scholars opinion on cryptocurrency.

Fatwa/ Opinion Issued by Verdict Reasons for verdict

Taha Karaan (Mufti) (South Permissible (Mubah) Based on istilah (social
Africa) concurrence) and ta’amul
Darul Iftaa, DUZ (South Africa) (common usage) that it is
Monzer Kahf (Professor) maal, allowing owning,
Siraj Desai (Mufti) (South trading. However, not
Africa) necessarily currency.
Darul Ihsan (Mufti) (South Abstain until further May be linked to a pyramid
Africa) clarification acquired scheme. Even if determined as
(Mamnoo’) currency, should not be a
means of one’s livelihood as
jurists allow trade of currency
as necessity only.
A S Abu Ghuddah (Shaikh) Abstain/impermissible Excessive uncertainty (gharar).
(Syria) (Mamnoo’) but not outright Security risk (khatar)
prohibition. It is unlike currency which is
regulated which is legal
tender.
Diyanet (Turkey) Impermissible at this time Excessive gharar and can be
(mamnoo’) easily be used in illegal activity.
Majlis al Ulama (South Africa) Prohibited (Haram/Tahreem) Not currency since it is not
Wifaqul Ulama (UK) legal tender.
(8 scholars of the United Current decentralised
Kingdom) validation (mining) based on
Haitham al-Haddad (Shaikh) gambling (wifaqul)
(UK) Highly unstable, making it too
Darul Iftaa, Deoband (India) risky
Shawki Allam (Mufti) (Egypt) Trading digital currency is like
Magdy Ashour (Egypt) trading trades (Deoband)
Assim al Hakeem (Saudi Funds terrorists (Ashour)
Arabia)
Source: (Mahomed and Ramadili, 2017, page 3)
 8. ACCOUNTING FOR CRYPTOCURRENCY

Currently, there are 2062 cryptocurrencies in circulation. Each of these cryptocurrencies has
different characteristics and its own unique features. In addition, the reason for acquiring the
cryptocurrency can be varied which makes accounting for them particularly challenging.
International Financial Reporting Standard (IFRS) does not have any specific guidance on
cryptocurrencies as there is no clear industry practice for it. The primary question that must be
addressed is whether cryptocurrencies are an asset or not. If it is an asset, what type of asset in
terms of IFRS standard? Based on IASB’s conceptual framework, the asset is a present economic
resource controlled by the entity as a result of past events. Thus, entities need to evaluate whether
each cryptocurrency meets the definition of an asset or not.

Cash or currency: Based on IAS 7.6, cash is comprised of cash on hand and demand deposits. In
addition, paragraph AG3 of IAS 32 also states: “Currency (cash) is a financial asset because it
represents the medium of exchange and is, therefore, the basis on which all transactions are
measured and recognised in financial statements”. Even though the term “cryptocurrency” makes us
assume that it is a currency, however, this does not mean it is cash for accounting purposes. At this
moment, cryptocurrencies are not considered as cash and currency because it is not recognised as
legal tender in most jurisdictions and are not issued by the central bank. In addition,
cryptocurrencies at this moment are not directly related to the setting of prices for goods and
services. Even though they might be accepted and used to settle some transactions, but it still
represents a limited medium of exchange compared to most traditional fiat currencies. From the
justification stated above, cryptocurrencies do not seem to meet the definition of cash or currency
under IAS 7.6 which is “short-term, highly liquid investments that are readily convertible to known
amounts of cash”. Moreover, the volatility of cryptocurrency prices is inconsistent with the
requirement that cash equivalents can be subject only to an insignificant risk of changes in value
(Deloitte,2018). In conclusion, cryptocurrencies are not likely to be accounted as cash at the current
time.
Financial asset (other than cash): The main characteristic of a financial asset is the holder of the
financial asset has the contractual right to receive cash or another financial asset from another
entity under conditions that are potentially favourable to the holder. Owning a unit of
cryptocurrency won’t make the holder has the right to receive cash or any financial asset. In
addition, cryptocurrencies do not offer the holder with a remaining interest in the assets of an entity
after deducting all of its liabilities. Therefore, cryptocurrencies seem not to meet the definition of
financial asset under IAS 32 and IFRS 9.

Investment property: In IAS 40.5, investment property is defined as a property (land or a building or
a part of a building or both held by the owner or by the lessee under a finance lease) to earn rentals
or for capital appreciation or both. Cryptocurrencies are not considered as an investment property
as they are not land or buildings as mentioned in the definition of investment property even though
some entities hold them for capital appreciation. As for now, cryptocurrencies are not considered as
investment property within the scope of IAS 40.

Inventory: According to IAS 2, inventories should consist of assets that are kept for sale in the
ordinary course of business and not necessarily to be in a physical form. The entity needs to
demonstrate that its business model for cryptocurrency is consistent with holding it for sale in the
ordinary course of business. Moreover, inventory is carried at the lower of cost and the estimated
selling price in the business is less than the estimated costs of completion.

IAS 2 requires that the cost of inventory that is interchangeable is assigned using either the
first in, first out or weighted average cost formula. In addition, IAS 2 wants the disclosure of the
amounts is written down and reversed.

The guidance in IAS 2 for commodity broker or traders should be applied to an entity that
actively trades the cryptocurrencies to generate a profit from the fluctuations in the price. However,
it would not be considered as inventory if the entity holds cryptocurrencies for investment purposes
which is capital appreciation over extended periods of time or as a hedge against another
instrument.

Intangible Asset: Based on IAS 38, intangible asset is defined as “an identifiable non-monetary asset
without physical substance.” Identifiable also can be defined as it can be sold, exchanged or
transferred individually. Cryptocurrencies are likely to meet the definition of intangible assets as it is
generally identifiable and without physical substance.
 In addition, an intangible asset must be measured initially at cost based on the requirement
of IAS 38. When an entity pays cash to get the cryptocurrency, the measurement of cost is
straightforward. However, at this moment, cryptocurrency is been used to exchange for goods and
services or another cryptocurrency.

When an entity receives cryptocurrency in exchange for goods and services, the
requirements in the relevant standard need to be assessed by the entity. For instance, when a
retailer receives cryptocurrency as payment, it means that the retailer has made a sale in accordance
to IFRS 15 (Revenue from Contracts with Customers).

There are two models for the subsequent measurement of intangible assets in IAS 38 which
are the cost model and the revaluation model. Both models allows a cryptocurrency to be measured
at fair value through profit or loss. If the fair value of a cryptocurrency is below its carrying amount
at a reporting date, an impairment loss would be recognised in profit or loss (Deloitte, 2018, page
14).

On the other hand, if the revaluation model is applied which means increases in the fair value of
a cryptocurrency above its cost are recognised in other comprehensive income. Even if the currency
is sold, they will never be reclassified into profit or loss. In contrast, if the fair value falls below cost
any movements are recognised in profit or loss, the presentation is not symmetric (Deloitte, 2018).

9. TAX IMPLICATION

Although cryptocurrency has been one of the main topics in the financial industry over the past
few years. The guidance regarding the tax treatment of cryptocurrency remains minimal. Only the
Internal Revenue Service has released clear guidance in the form of Notice 2014-21 four years ago.
The IRS’s guidance position virtual currency as a digital representative of value that functions as a
medium of exchange but does not have all the characteristics of real currency such as legal tender
status in any jurisdiction. The Internal Revenue Service considers cryptocurrency as property, not as
another currency. The guidance also states a few tax treatment towards cryptocurrency.

Firstly, when cryptocurrency is exchange or sold for cash, the taxpayer recognises a gain on the
difference between the amount of the cash or the fair market value of the property received.
Secondly, when the crypto is considered as a capital asset such as investment property, any gain or
loss from the sale of the asset is taxed as capital gain or loss. Thirdly, when the cryptocurrency is
received from airdrops or mining activity, the fair market value of the cryptocurrency in gross
income on the data received is included. Last but not least, when the cryptocurrency is considered as
inventory or held for sale to customers in a business, the gain or loss is ordinary
 10. CONCLUSION

After six years of development, although cryptocurrency still in their infancy, they may give an
impact towards the financial services ecosystem. There are still a lot of improvements need to be
done especially in term of security, governance and accounting standard. In term of accounting
perspective, it is hard to classify cryptocurrency is under what type of asset as the technology is still
evolving and the functions of it, especially in the financial system, is still uncertain. The future of
cryptocurrency is still unknown but it has a big potential to change the traditional payments method
and improve our lifestyle.

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