The term cryptocurrency has been circulating for quite some time and growing increasingly popular in the last few months.  

Cryptocurrencies are the most famous examples of blockchain technology in use today. Before we jump into the precise accounting treatment of cryptocurrencies, let's start with the basic:

What is cryptocurrency?

A cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service. (source: James Royal, Ph.D., Kevin Voigt)

How do cryptocurrencies work?

Cryptocurrencies work using a technology called the blockchain. Blockchain is a decentralized technology spread across many computers that manage and record transactions. Part of the appeal of this technology is its security.  

However, the accounting rules to classify cryptocurrency have not caught up with today’s demands, and there is a real challenge to get universal agreement on the precise accounting treatment of cryptocurrencies.  

Generally accepted accounting principles (GAAP) consider cryptocurrency to be an intangible asset that is recorded at cost, and impairment of the asset cost must be recorded. 

This GAAP principle means that the value of the crypto will have to be reduced on the company's balance sheet over time even if it does not accurately reflect the economic value of the cryptocurrency at market value. Most crypto is held as an investment and rapidly appreciates. 

There is an argument that something digital is not tied to a physical form for value and is thus intangible. However, if there is an available market, the digital-only asset can be readily exchanged for goods and services, including U.S. dollars. We are experiencing a period of data digitization, with more digital assets being created every day. (source: forbes.com)

A few financial companies ( for example, Deloitte) notes that investment companies that invest in cryptocurrencies “should account for them as they would any other investment that they measure initially and subsequently at fair value.” 

The direction of where accounting standards will go is valuing cryptocurrency in balance sheets at market value. Will this modification be applied soon? We will have to wait and see.