The rise in the global use of digital assets presents new challenges for how to properly account for these types of assets in financial statements following GAAP.  Understanding what digital assets are and how to categorize the different types of assets is crucial for the auditor.  CPAs must be able to account for investments in and transactions involving digital assets according to GAAP.  The information below defines a digital asset and provides definitions of the types of digital assets.

The AICPA broadly defines digital assets as ‘digital records, made using cryptography for verification and security purposes, on a distributed ledger’.  Digital assets are a representation of value and they are stored on a blockchain record-keeping system (distributed ledger).  Storage on a blockchain is required for classification as a digital asset.  Digital assets encompass traditional sources of value, such as stocks or patents, as well as newer sources of intangible value, such as rights to access an online platform and Bitcoin.

Each digital asset must be assessed individually, mainly due to its unique characteristics.  However digital assets with similar characteristics can be tested similarly.  Various regulatory bodies have set up four basic categories to classify digital assets.  These four categories are: asset tokens, utility tokens, payment tokens and hybrid tokens.  The word token stands for a unit of value represented in the form of a digital asset, similar to ownership in a company.

Asset Tokens

An asset token is a digital asset that represents ownership of a physical or intangible asset.  These tokens can represent many types of physical assets, some of which are real estate, inventory, stocks, bonds and gold bullion.  The owner of an asset token has the same ownership rights as a person holding a paper bond or stock certificate, however there is more security and transparency of the digital asset held on a blockchain record-keeping system.

Utility Tokens

Utility tokens represent a payment type for different types of rights.  These tokens are created as a way to pay for the right to access a good or service.  Some examples of utility tokens are the right to early access to purchase event tickets or to pre-released online games.  Utility tokens are a way for companies to grant special rights to customers and to quantify the value of the rights as well as make a more personal connection with the customers.

Payment Tokens

Payment tokens operate in the same way that a US dollar functions.  These tokens correlate the most with traditional forms of money.  Payment tokens do not represent ownership in an asset or the right to a good or service.  Payment tokens create value through their scarcity (limited supply) and their ability to be transferred instantly between parties.  Users can send money instantly without the involvement of a third-party bank.  A well-known type of payment token is Bitcoin. 

Hybrid Tokens

Hybrid tokens are digital assets with characteristics from more than one of the other token categories.  Hybrid tokens are designed to offer all different types of characteristics for customers.  They can be tailored more to the customer base to meet their needs and wants.  The combination of the asset token and the utility token is one type of hybrid token.  One example of this type of hybrid token is a company that offers shares of ownership as well as the right to receive products before they are sold in stores.