Grayscale Investments CFO Ed McGee doesn’t pull any punches when it comes to how he thinks regulators can best solve crypto-asset accounting headaches that have been cropping up.
For starters, as the Financial Accounting Standards Board (FASB) is poised to take up the current status of its research into digital assets accounting next week, McGee said he hoped the “long overdue” effort would result in the creation of a stand-alone section of the U.S. GAAP accounting standards that would detail how to treat and disclose the risk related to digital assets.
At the same time, he expects that it will take years to develop via FASB’s traditionally slow-moving standard setting process. That leaves many stakeholders stuck with the current system under which digital assets are generally treated as intangible assets that have to be carried at cost rather at the fair market value, he said.
Instead, McGee, the finance chief of a company that bills itself as the world’s largest digital asset manager, said he sides with a number of other market participants who support FASB proceeding with temporary relief that would allow digital assets to be held at fair value more quickly.
“In the interim what they can do to solve this issue immediately is … to allow corporate enterprises to elect fair value. I think that would solve a lot and would not require as much time and effort from a FASB perspective,” he said.
FASB spokesperson Christine Klimek said FASB next week will address stakeholder input received on digital issues, including feedback “that the board should consider permitting entities to elect to fair value certain digital assets.”
The recent intensifying focus of regulators on accounting treatment underscores the maturing of the sector that McGee followed closely even before joining Grayscale in 2019. After taking a more traditional finance route earlier in his career working for Ernst & Young and then Goldman Sachs, McGee pivoted to join the digital asset manager.
“It’s been a wild ride,” said McGee, noting that he has had to adjust to the asset’s volatility but considers himself fortunate to have been able to witness the growing acceptance of the currency by mainstream financial institutions. Grayscale now has about 18 different products including the Grayscale Bitcoin Trust with a total of $35 billion in assets under management (AUM) as of Friday.
In one of the latest signs of growing cryptocurrency momentum, Fidelity Investments announced that it would offer employer clients a bitcoin option for 401(k)s although that was shortly after the U.S. Department of Labor urged fiduciaries to “exercise extreme care” before adding cryptocurrency to employee investment offerings.
In addition to FASB, the Securities and Exchange Commission (SEC) is also focusing on digital assets more closely. Last month the SEC released guidance effectively saying that companies should disclose the risks to investors from cryptocurrencies held on behalf of customers and account for the assets as liabilities.
McGee said he is encouraged that the SEC showed it realizes how quickly they need to move. But he also said the guidance has raised a number of questions because it lacks details and that the SEC might have been better served by working more closely with the industry participants before moving forward.
“There’s a lack of specificity on the scope where issuers are really trying to understand if they are scoped in, and the type of disclosures the SEC outlined are very general,” McGee said. “For example, they didn’t name broker dealers, they didn’t name digital assets custodians. So that leaves everyone in a position of trying to interpret whether they fit into [the guidance] examples or not.”
The accounting guidance has also drawn criticism from SEC Commissioner Hester Peirce who said in a statement that the SEC disclosure and accounting guidance on digital assets exemplifies the agency’s “scattershot and inefficient approach to crypto.”
Separately, Grayscale is currently awaiting SEC approval to convert its Grayscale Bitcoin Trust into a Bitcoin Spot ETF. Grayscale CEO Michael Sonnenshein said in a March 28 Bloomberg interview that “all options” are on the table if the SEC rejects its request. A Grayscale spokesperson confirmed that the company is on record as saying it would consider all options including legal action against the SEC if the conversion is not approved.