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While everyone is in agreement that cryptocurrencies fall within the category of assets, it is still held as controversial as to which class it belongs. Accounting standards are yet to provide a special classification for digital currencies. It is for this reason that accountants would resort to applying the traditional classes and their definitions in ruling where crypto assets would fall.
Is It Considered as Cash?
Perhaps you might have known a bit about the history of Bitcoin. It used to be considered a digital form of money as a medium of exchange. However, it cannot still be considered as the digital form of fiat currency. Cryptocurrencies lack certain attributes of traditional forms of money. Learn how it is different by trying out crypto trading with the team of Bitcoin Era.
For instance, money is usually represented by a fixed value governed by the Central Bank. Its value depends on economic policy, not to mention its position of strength globally. This would be best attributed to the dollar, which has been recognized for its viability as a medium of exchange.
When it comes to cryptocurrency, the value may fluctuate depending on market behavior. It is beyond the scope of regulation by the government. Simply put, it is governed by private entities through a network of computers. The transactions are operated through cryptography to ensure that they are safe and secure.
How about as Cash Equivalents?
When you say cash equivalents, these are highly liquid investments that can be considered good as cash. These are accounts falling under current assets, which are easily convertible to cash, such as bank deposits, receivables, and short-term bonds. Apparently, they all share the ability to be easily converted into cash.
Cryptocurrencies, moreover, have a high rating when it comes to liquidity. Perhaps you have noticed that the monetary amount of digital coins can be easily withdrawn upon selling your funds. If you have tried crypto trading, you can have first-hand experience on how you can liquidate your funds.
The only thing that gets in the way of digital currencies from being tagged as cash equivalent is the amount of risk involved in affecting the change in value. It is no secret that the crypto market can be highly volatile, too. The value of virtual currencies can be abruptly subject to change.
Now, Can It be a Financial Asset?
Since it has value, you may want to think of cryptocurrencies as a financial asset. It can be exchanged for its corresponding amount in money, whether as cash or an equivalent product. In a sense, it generates transactions of financial value at the least.
Financial assets are defined as cash or perhaps its equivalent, an equity interest over a company characterized by stocks, or a contract of obligations involving money or its equivalent. Nowhere in any of these could cryptocurrencies be embraced. For this reason, it is not considered a financial asset.
As it is unregulated, it has no definite value backed by the government. The Central Bank has come up with its own digital banknotes with a definite value. This currency is secured compared to its crypto counterparts.
Or, Maybe Financial Security?
At least some experts would view cryptocurrencies as financial securities. Ripple is now under scrutiny for violation of federal laws on securities. It has allegedly created digital currencies which are considered financial securities. As described by Mr. Jay Clayton, these are considered tokens being bought to generate returns.
Bitcoin, however, is not one of them. It has been ruled out as financial security after having been created as simply a monetary unit. That is according to the Securities and Exchange Commission. From the very start, it was tagged as a medium of exchange.
Whether some digital currencies would fall under the class of financial securities, you will have to wait for the court’s interpretation of the law. Until then, it is only proper to keep the status quo so as not to disturb the crypto market.
Cryptocurrencies fall squarely within the class of intangible assets since it is non-monetary due to the unpredictable nature of their value. Perhaps sooner or later, a special category for crypto assets will be developed to better be guided as to how it is supposed to be treated. This way, there would be no assumptions.