FASB Clears The Path For Corporate Bitcoin Adoption

High-profile bank failures like Silicon Valley Bank have prompted corporations to find new ways to insulate themselves from financial risk by diversifying the assets they hold on their balance sheets.

A liquid asset untethered from the traditional banking system, Bitcoin BTC/USD provides flexibility to firms. For example, it could allow companies to continue operations and fulfill short-term obligations, like making payroll, should their bank accounts suddenly become inaccessible.

Until now, Bitcoin has not frequently been held on the balance sheets of public companies. This has less to do with its volatility, and more to do with accounting rules that complicate a firm’s ability to account for the value of Bitcoin holdings.

However, this has now changed with last week's rule change by the Financial Accounting Standards Board (FASB). With the change, Bitcoin ownership will become more practical for public companies, potentially opening the floodgates for corporate adoption.

The Rule Change Explained

Under current accounting standards, companies treat Bitcoin like an indefinite-lived intangible asset akin to intellectual property such as a copyright. 

Corporations must write down the value of their Bitcoin holdings if it falls below the purchase price, while gains can only be recorded if the Bitcoin is sold. This requirement makes it challenging for public companies to own the asset, given that its price is highly volatile in the short term. 

Under the previous rules, a reduction in the market price of Bitcoin would force companies to record a loss – even if a subsequent price recovery exceeds the value of the price at which the company acquired it. The only way to report a gain was by selling the Bitcoin at a higher price.

The move by FASB to apply fair value accounting rules to Bitcoin allows firms to present a more accurate reflection of the market value of their holdings.

Expected to be formally published by the end of the year, these rules will require companies to regularly assess and report the fair market value of their Bitcoin position, capturing both unrealized gains and losses on a quarterly basis. The rules will go into full effect in 2025.

Importantly, companies will no longer have to sell their Bitcoin to record its appreciation. This will make it practical for companies to buy and hold Bitcoin if they believe it will appreciate over the long term. 

Additionally, the rule change improves financial reporting transparency by allowing companies to report a more accurate picture of their market valuation.

Adoption Puts Pressure On Regulators

Today, Bitcoin is primarily held by individuals and financial institutions seeking to diversify away from the traditional financial system.

Bitcoin ownership at the corporate level has yet to occur on a meaningful scale. Only a handful of publicly traded companies own the asset today, many of which are Bitcoin mining companies or cryptocurrency exchanges.

However, this rule change reflects, and will likely accelerate, a deeper integration of Bitcoin into mainstream financial markets. 

This accounting rule change may be partly attributed to Bitcoin advocate Michael Saylor, whose advocacy for such a change resulted in FASB receiving hundreds of letters urging it to revise its standards in 2021.

It is worth pausing to appreciate that, fifteen years after it was invented, the success of Bitcoin is prompting respected standards bodies like FASB to reconsider their rules to make Bitcoin ownership easier for the largest and most influential companies in the world.

Corporate adoption and awareness of Bitcoin's ability to "de-risk" balance sheets from potential bank failures will only increase confidence in it.

As institutions look to Bitcoin as an alternative to the counterparty risk offered by traditional finance, regulators and standards bodies will continue this trend toward streamlining Bitcoin ownership.