Run but you can't hide: There's no avoiding the impact of crypto on public companies

Investors must consider how cryptoasset price swings, and the “special” qualities of crypto, will affect results and taxes.

If you’ve been reading here, and while I was at MarketWatch, you’ll know that I’m a skeptic regarding the legitimate utility and long-term viability of cryptoassets.

But this 500-pound black bear is eating everything! We can’t continue saying, “Let’s just ignore him as long as he doesn’t attack anyone.”

I sound the sirens, shoot trenchant analyses at it, and mark it with red flags, but crypto is a 500-pound black bear in my front yard demanding my attention despite my desire that it just go away quietly.

So, I’ve been writing here about the public companies that are investing and transacting in crypto, in particular in bitcoin , and about the DeFi trend. I wrote quite a bit at MarketWatch about ICOs, an early phase of digital involvement that caught the eye of the Securities and Exchange Commission. I carried that reporting here to look at how the ICO market was morphing into the next phase of tokens, in particular Ripple/XRP, and into the stablecoin environment, in particular at Coinbase and Circle.

I’ve also written here on the accounting for crypto as it hit public companies, in particular Tesla. Now Microstrategy is the dominant player in the public company crypto space, betting everything on bitcoin.

I’ve been asked to comment on the stablecoin issue for more than one crypto-focused publication during this time.

The Financial Times asked me to comment on how Microstrategy tried to divert attention from the conventional losses from its bitcoin strategy and how the SEC recently snapped-back on that ploy.

FT Opinion | Markets Insight | Crypto accounting: investors need more clarity on the rules

Companies should have stronger guidance on how to present the changing value of their digital asset holdings

I’ve also written on the SEC’s regulation of nascent crypto exchanges and broker-dealers such as Coinbase who have, thus far, remained unregulated exchanges and broker-dealers since the assets being traded are, as yet, unregulated.

That is not really an effective strategy for the long-term.

BlockFi Agrees to Pay $100 Million in Penalties and Pursue Registration of its Crypto Lending Product

Company also agrees to attempt to bring its business into compliance with the Investment Company Act of 1940 within 60 days

Today published my opinion on the tax impact of crypto activities on public companies:

Opinion: Taxes Are a Wild Card for Public Companies Holding Crypto

Investors in MicroStrategy, Tesla, Block and Coinbase need to consider how wild price swings will affect results, not only directly but indirectly due to complex tax accounting rules.

Key takeaway? When public companies like Microstrategy bet everything on bitcoin — and try to divert attention from the fact that the strategy is an ongoing loser — investors may not see the final blow coming.

If bitcoin goes lower or starts to crash, not only does an increase in the valuation allowance become inevitable, but the value of the bitcoin set aside as collateral for the secured notes will also decline. MicroStrategy would then need to pledge additional bitcoin as collateral to secure that debt. A sustained price decline could also cause MicroStrategy to sell its bitcoin at a loss, which would create even more potentially unusable deferred tax assets.

At the end of the piece I hint at topics to come:

Asset-backed tokens like non-fungible tokens (NFT) may digitally represent an asset like art or may represent only limited rights. Tax and reporting will be complex if, for example, the seller, buyer and asset are in three different jurisdictions.

However, David Larsen, an alternative asset specialist at risk consulting and corporate investigations firm Kroll, told me the NFT trend isn’t material enough yet to appear on public company balance sheets.

The story of the tremendous growth of NFTs, the recent theft of them from Opensea, a leading NFT “exchange”, via a phishing scam, and the burgeoning impact of asset-backed tokens — for art, real estate and precious metals such as gold — on public companies and “exchanges” is coming up next, for subscribers only, here at The Dig.

Subscribe now, at a special rate until the end of February, to read the rest.

© Francine McKenna, The Digging Company LLC, 2022

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