New Accounting Guidance Proposed for Stablecoins

The Financial Accounting Standards Board (FASB) has put forward new guidance that outlines the specific circumstances under which companies can classify certain stablecoins as cash equivalents, in accordance with U.S. generally accepted accounting principles.

On Tuesday, the board announced that its proposed Accounting Standards Update is designed to tackle the inconsistent accounting treatment of digital assets like stablecoins. This will be achieved by adding illustrative examples to the current definition of cash equivalents, while the definition itself will not be altered.

Strict Criteria for Qualification

To qualify under the proposed rules, a digital asset must meet several conditions. It would need to offer an on-demand contractual redemption right and provide the holder a direct right to redeem it with the issuer for a known amount of cash. Additionally, the asset must be backed by segregated reserves held in short-term, highly liquid assets at a ratio of at least one-to-one.

FASB stressed that liquidity in a secondary market, by itself, is not sufficient for a stablecoin to be classified as a cash equivalent. The board specified that holders must have direct redemption rights with the issuer, and the token must be supported by one-to-one liquid reserves.

To provide clarity, the proposal includes specific examples. One scenario notes that an active secondary market is inadequate if the holder lacks a direct redemption right from the issuer. Another example explains that a token would be disqualified if its reserves include assets like other cryptocurrencies and gold, due to the inherent valuation risks.

Company Discretion and Next Steps

Even if a stablecoin meets the proposed criteria, companies will maintain the choice of whether to present the qualifying assets as cash equivalents on their financial statements. They will also be required to consider all relevant laws and regulations when making this classification.

The FASB is currently accepting public comments on the proposed update until November 19. After the board reviews the stakeholder feedback it receives, it will establish an effective date for the new guidance.