FAQ
General Questions
What is a Statement of Digital Assets?
The Statement of Digital Assets is a standardized reporting approach that clarifies an organization’s digital asset holdings, providing a bridge between Generally Accepted Accounting Principles (GAAP) based balance sheet reporting and the value represented in wallets.
SoDA provides detailed support to the digital asset entry on the balance sheet by listing every wallet and asset combination (Wallet/Asset Pair) along with business use or purpose. Fair market value is also calculated to provide a more rational sense of liquidity. Taken with a firm’s fiat holdings and select other assets, SoDA attempts to present a more complete picture of a firm’s liquidity.
Recording accurate journal entries is of the utmost importance in bookkeeping. Making sense of what is making up the entry, however, is essential to all stakeholders and professionals that need visibility to a firm’s health. The Statement of Digital Assets is a fundamental tool for providing this visibility as it relates to digital assets.
Why is the purpose of a Statement of Digital Assets?
The purpose of SoDA is to provide a complete picture of a firm’s liquidity and a transparent accounting of digital assets. It serves as a transparent bridge between accurate GAAP reporting of digital assets and the details from multiple wallets, centralized exchanges, and other cryptographically-based ownership and/or custody arrangements.
The first use case was delivering a full liquidity picture for managers of and investors in growth stage businesses with digital assets on their balance sheet. Traditional GAAP reporting does not fulfill this operational need as it does not sufficiently detail conditions, exposures, and/or holdings to more fully derive the full liquidity picture of the digital assets held by an organization. Additional beneficiaries now include auditors, tax planners, regulators, analysts, and many more direct and indirect stakeholders who need to understand the true nature and value of the digital assets on the books of the organization.
Why is a Statement of Digital Assets needed?
A balance sheet exists to report what a business owns (assets), what it owes (liabilities) and what the ownership or equity in the business is. GAAP is the financial reporting language of business in the United States, unfortunately existing reporting standards for businesses interacting with crypto can make the balance sheet opaque. Current practice for recording digital assets breaks several core purposes of a balance sheet – primarily understanding and assessing liquidity.
The balance sheet should tell the complete financial story for an entity but unfortunately for those that hold or transact in digital assets, it does not. This inadequacy is due to digital assets being defined as indefinite-lived intangible assets that necessitates the valuation at the lower of cost or impaired value. By definition, values on the balance sheet can only be marked down, not up (or “marked to market”).
What are the benefits of a Statement of Digital Assets?
Standardizing around a generalized Statement of Digital Assets format benefits many stakeholders as it creates a framework that can be used to inform many business processes and downstream analysis. Just as the income statement, balance sheet, and cash flow statements touch on a broad spectrum of internal and external needs, the Statement of Digital Assets also brings about comparability for investors and other stakeholders to analyze organizations easily on an apples to apples basis.
A few examples of applications and beneficiaries are listed below. These uses will benefit from a common structure and collective reasoning. Furthermore, the evolution of tools and processes in pursuit of a shared model will further accelerate the capabilities and usefulness of this approach.
Standardization Beneficiaries
Financial Planning and Analysis
Treasury Management
Investor Reporting
Regulatory Compliance
Audit Readiness
Tax Preparation
Token Incentive Planning
What is the difference between a Statement of Digital Assets and a Proof of Reserves?
The general intent of a Proof of Reserves is to allow for an on-chain representation of the reserves held by an organization primarily for the purpose of establishing the amount of backing there might be in support of investment activity, custodial holdings, or other counterparty arrangement.
The purpose of SoDA is to provide a complete picture of a firm’s liquidity and a transparent accounting of digital assets. It serves as a transparent bridge between accurate GAAP reporting of digital assets and the details from the variety of ownership holdings within an organization and is typically produced on the same schedule – i.e. monthly, quarterly, annually, or as of a specific date – as the balance sheet of an organization.
The Statement of Digital Assets has been derived from an internal need for clarity and operational insights. Additional beneficiaries now include auditors, tax planners, regulators, analysts, and many more direct and indirect stakeholders who need to understand the true nature and value of the digital assets on the books of the organization. A short list of benefits are detailed above, the list of which is likely to expand were this framework to be commonly adopted and accepted.
Production of Statement of Digital Assets
When is a Statement of Digital Assets generated?
The generation of a Statement of Digital Assets can be viewed similarly to the generation of a balance sheet. The purpose of a SoDA is to provide detailed support to the digital asset entry on the balance sheet and so it would be generated on a monthly, quarterly, or annual basis; on an interim basis as part of a transaction and/or report to one or more stakeholders; and/or for any other circumstance as one might produce a balance sheet.
Who creates a Statement of Digital Assets?
The responsibility for producing a Statement of Digital Assets will typically fall under the domain of the finance team, either produced directly or outsourced to a crypto-based accounting firm skilled in the process.
It is the finance team’s responsibility to manage and close the books, evaluate the performance of the business, determine and record tax exposures, manage the treasury, and perform financial planning and analysis functions. The finance team will need to effectively communicate the balances and analytics related to these digital assets to management, investors, tax partners, auditors, and numerous other internal and external parties.
How is a Statement of Digital Assets created?
A Statement of Digital Assets can be created via a multi-step process, an example of which is summarized in the Statement of Digital Assets document, the sum of which can result in a well-qualified Statement of Digital Assets.
The process of calculating GAAP-compliant crypto activity is a non-trivial task and relies heavily on crypto subledger technology. These software platforms translate on-chain activity journal entries for revenue, cost of sales, expenses and any associated realized gains or losses. Additionally, the subledger supports the balance sheet crypto entries both assets and liabilities
Creation of an accurate Statement of Digital Assets starts with the wallets of an organization or individual. A critical second step is to record and make sense of any and all digital transactions and account balances. A crucial tool in this area is the use of a crypto-focused subledger that can perform the bulk of the data collection, aggregation, and organization of all on-chain and offchain activity. Once reconciled, digital asset activity can be pushed from the subledger to the general ledger.
Data from the subledger and the general ledger will be utilized in order to populate the Statement of Digital Assets. This combined output allows for a complete picture of digital asset balances and activity for the reporting period and bridges the “GAAP” between the Balance Sheet and on-chain activity. Said another way, it is a common sense approach to how the balances presented on the GAAP-basis Balance Sheet tie to wallet holdings and activity.
How are digital assets represented or organized within the Statement of Digital Assets?
Digital assets are organized in the Statement of Digital Assets by wallet, asset type, and role. Digital assets are highly diverse in nature with varying liquidities, durations, and asset types. This organizational structure details the quantity of tokens, fair market value and book value for the period, and the book value as reconciled to the Balance Sheet.
This reporting structure also allows for recording other key performance indicators including unrealized gains or losses, portfolio holdings by token, summary by role, yield, liquidity, and tax scenario analysis may be tailored. The breakdown by wallet, asset, and role lets the finance team visualize the full ‘build’ while also letting non-accountants reconcile and effectively bridge what is on the balance sheet from a GAAP perspective with what exists on-chain.
Why is the wallet a component of the Statement of Digital Assets
The use of wallets as an organizing primitive serves not only to determine the location of assets but also identify the store of specific assets (although assets are not wallet specific) and general intent of use. Most digital asset-based businesses will use different wallets with different signatories and signing arrangements. ‘Wallet’ is a human-readable identifier and each wallet is tied to either a self-hosted wallet address or a wallet held by a third party custodian.
What is the role of the digital asset and how is it assigned?
Role reflects the varied use of Wallet/Asset Pairs within digital asset based businesses. Roles are user generated and specific to businesses and allow users to ‘roll up’ their wallet balances in categories that align with the way their treasury is managed. The particular categorization used allows for multifaceted roll-up views.
Roles are entity-specific uses applied to the Wallet/Asset Pairs that provide important information for how to perceive their functions and uses as part of business operations, treasury, custodial holdings, or other. The Statement of Digital Assets document provides a list of roles being used in current statements but it is by no means a definitive or exhaustive list and will likely evolve greatly over the coming years..
Nature and Origin of Statement of Digital Assets
Is the Statement of Digital Assets an officially recognized financial statement?
Not at this time. Crypto accounting is still in the early stages of development due to a variety of factors which include evolving financial guidelines, uncertain regulatory guidance, developing accounting tools, nonstandard reports and processes, audit and assurance challenges, and more.
The goal of this initiative is to propose a generalized format for the reporting of digital assets. How it gets propagated throughout the industry and recognized and/or adopted by finance and regulatory bodies will be determined by its acceptance in and support by the community in furthering this effort.
Is the Statement of Digital Assets a proprietary or novel creation?
No. It is neither a proprietary creation nor a revolutionary or novel financial expression. Were a handful of crypto finance and accounting professionals given the task to try to independently make sense of digital assets in terms of their GAAP entries on the balance sheet and fair market value (FMV), we are confident that they would each come up with versions materially similar to this analysis.
The work on the Statement of Digital Assets and other related materials is being performed as a public good so as to establish a common framework for the reporting of digital assets. The work is being performed by a number of stakeholders in the crypto space who support this goal. The documents published on this website have all been released under a Creative Commons license.
What is the origin of the Statement of Digital Assets?
The intentions behind the earliest versions of the Statement of Digital Asset were not meant to create a formal accounting standard but rather to serve the operational needs of teams running digital asset-based businesses. SoDA was created to provide management a way to understand the value and use of digital assets held in their treasuries. Spreadsheets were largely the tool of choice to translate on-chain activity to balance sheets and generate journal entries for the income statement. This work proved cumbersome, inefficient, and often inaccurate.
The rise of crypto subledgers eventually provided accounting teams with more efficient ways to record digital assets transactions. The general format began several years ago with its use within a handful of organizations and then proceeding to more organizations, each with different asset compositions and business models. A number of interactions eventually led to working models that provided the correct GAAP entry for the balance sheet while still supporting more transparent and detailed representations of fair market values of the digital assets held by an organization.
The most recent expression of the Statement of Digital Assets is the result of ongoing collaboration by accounting and audit professionals, VCs, crypto practitioners, subledger providers, and others..