Blockchain-Powered Stablecoins Are Maturing Quickly, But The Accounting Needs To Catch Up

Stablecoins offer tremendous promise, but to go mainstream the accounting and reporting issues need to mature and catch up.

Stablecoins have, with good reason, developed and become a large part of the broader crypto conversation. By addressing one of the most prominent issues with traditional decentralized cryptocurrencies, price volatility, stablecoins have the potential to encourage wider adoption by merchants and individuals alike. That said, the very design of stablecoins might actually be complicating the accounting, reporting, and treatment of these assets.

In other words, the core value proposition of stablecoins might actually be a headwind to the wider adoption these cryptoassets were created to achieve.

The concept of stablecoin seems to represent the best of both worlds when comparing fiat and cryptocurrencies, a cryptoasset that is supported, tethered, or otherwise connected to an underlying asset. Whether or not the cryptoasset is connected to an existing fiat currency, such as the US Dollar, or some other external asset such as gold or oil, the purported use case is the same. Due to the lower price volatility associated with stablecoins, the thinking goes, the more likely it is that individuals and businesspeople will use these cryptoassets as an alternative to fiat versus treating them as speculative investments.

All of that said, several fundamental accounting and reporting questions remain unaddressed; these will need to be resolved for the wider adoption that proponents of stablecoins, and crypto at large, would like to see.

Solving these items, or at least attempting to address them, is something that any proponent of stablecoins and cryptoassets at large must be an active part of moving forward.

The open accounting questions

First, how are the values of stabilizing assets reported and disclosed to the wider marketplace? For example, if a stablecoin is connected to gold, how does the change in the valuation of that underlying asset impact the value of the crypto, and how is that change in valuation reported? Commodities and other assets can swing wildly in value, perhaps most clearly demonstrated with the recent dramatic swings in the price of crude oil, so having processes in place to reflect these valuation changes is important.

Given the ambiguity in terms of authoritative accounting guidance to date, this does represent an open item that could potentially represent a obstacle to wider adoption.

Second, would an individual or merchant who is in possession of a stablecoin be able to redeem or exchange the stablecoin for the underlying asset if so desired? Given the fact that there is a fair amount of economic uncertainty overall, and that cryptocurrencies have permeated into both developed and developing markets, this is not an idle question. For illustration purposes, if a stablecoin is backed or supported by gold, would a holder be able to exchange this stablecoin for physical gold or not? Clarifying issues like this is an incredibly important step to achieve wider adoption.

Thirdly, insurance and other protective measures still remain open items for both individual and institutional users seeking to integrate stablecoins into normal business operations. With the prevalence of data hacks and breaches, it would be naïve to assume that stablecoins and issuing organizations would escape these attacks. Specifically, when some of the largest crypto exchanges in the world have been hacked, hesitation on the part of businesspeople and investors is not unwarranted.

Establishing and codifying insurance and other protective measures for investors, individuals, and entrepreneurs is an important step that will help encourage wider blockchain and crypto adoption.

Accounting and reporting issues might not make for great headlines, but getting these issues resolved is a key step toward wider stablecoin adoption. Cryptocurrencies, stabilized or not, are increasingly part of the business and investment conversation, but until accounting questions and considerations are resolved, they will struggle to achieve mainstream adoption.

Taking a proactive position, and being involved in the conversation, financial professionals can – and should – be a driving force assisting stablecoin and cryptoasset adoption.