Can Fiat‐backed Stablecoins Be Considered Cash or Cash Equivalents Under International Financial Reporting Standards Rules?

Abstract

Stablecoins are a rapidly evolving subcategory of cryptocurrency that aim to reduce the price fluctuations of traditional cryptocurrencies and thus become a common digital payment instrument. This paper aims to assess the material substance of fiat-backed stablecoins to determine whether fiat-backed stablecoins could be considered, in accordance with IFRS, as cash or cash equivalents. We chose 11 fiat-backed stablecoins representing 99.97% of the total market capitalisation of all fiat-backed stablecoins. Using a three-step approach, we performed an analysis of the legal and general terms and conditions of the selected stablecoins and of cryptocurrency exchanges, and quantitatively analysed their risk characteristics in comparison with fiat currency pairs, money market indexes and instruments, and traditional cryptocurrencies. The results show that nine of the 11 stablecoins met the objective requirements of cash equivalents according to their material substance and, using an extensive interpretation of IAS 7, could be reported as cash equivalents. This study enhances understanding of the material substance of fiat-backed stablecoins for their financial reporting and can be used by entities when creating accounting policies under existing IFRS rules and by accounting standard setters as evidence when formulating new rules or officially interpreting existing ones to provide guidance on the financial reporting of fiat-backed stablecoins.

Recognition and Measurement of Crypto-Assets from the Perspective of Retail Holders

“…While there is a quasi-unanimous consensus that cryptocurrencies cannot be classified as cash, i.e., functional currencies [5,11,30,39], some commentators consider that cryptocurrencies can be recognized as cash equivalents under IAS 7 [45,46] because they are readily convertible and their economic substance is similar to money market instruments that are considered cash equivalents under IFRS [11,47]. Procházka [25] considers that cryptocurrencies could be presented in financial statements as cash equivalents if they are acquired in a business transaction as a medium of exchange.…”

“…( 68)). EFRAG [5] admits that a clear definition of cash and cash-equivalents should be provided by IFRS in order to explain whether e-money can be classified as either of these [46]. This clarification will have implications for monetary policy and financial stability [5] if e-money tokens are not adequately backed by sufficient reserves in cash, in the case of financial institutions.…”

“…Given the nature of the underlying assets, asset-referenced tokens can be on-chain collateralized stablecoins (where the underlying assets are other crypto-assets) or off-chain collateralized stablecoins (where fiat funds or commodities such as gold serve as collateral). The collateral is in the possession of the issuer or recorded on the blockchain in the wallet of the issuer [46]. Asset-referenced tokens are excluded from the definition of e-money [17].…”

“…(a) equity tokens-a digital representation of equity, carrying the right to vote in the general meeting of shareholders and potentially receive dividends; (b) debt tokens-the right to principal repayment and receiving interest; or (c) derivatives tokens-crypto-assets representing option and forward derivatives [5,46,61].…”

Blockchain in accounting practice and research: systematic literature review

“…Accounting for cryptocurrencies as cash falls under IAS21 "The Effects of Changes in Foreign Exchange Rates" if one adopts a broad definition of cash that goes beyond legal tender status (Proch azka, 2018;Hampl and Gyönyörov a, 2021).…”