In the lead-up to the establishment of accounting guidelines for cryptocurrency reporting, businesses adopted a variety of strategies regarding how they revealed their engagement with this emerging digital currency. Investors found themselves relying heavily on qualitative explanations surrounding a company’s involvement with cryptocurrency, as opposed to concrete numerical data. A study analyzing the disclosure practices of five prominent firms during the volatile cryptocurrency market from late 2018 through the “crypto winter” of late 2022 indicated that companies tended to enhance the clarity and frequency of their crypto-related disclosures when market conditions were favorable, but scaled back these communications during downturns.
Market Conditions Influence Disclosure Practices
“To effectively communicate complex subjects like cryptocurrency, companies may choose to simplify the information presented to investors,” explained Ramy Elitzur, an accounting professor at the Rotman School of Management at the University of Toronto. “During bullish market phases, firms often highlight their involvement in these activities, while during bearish markets, they may intentionally distance themselves to mitigate negative perceptions or scrutiny.”
Professors Elitzur and Wendy Rotenberg employed artificial intelligence techniques to analyze the financial disclosures of GameStop, Tesla, MicroStrategy, Coinbase, and PayPal. Companies like Tesla primarily viewed cryptocurrency as a financial asset or a payment option for customers. In contrast, Coinbase and PayPal generally operated on the “supply side,” offering trading services or selling cryptocurrencies to consumers. Their findings were published in the Journal of Alternative Finance.
Analysis of Public Interest and Disclosure Quality
In addition to examining the corporate disclosures from these five firms, researchers utilized Google Trends to assess public interest in their cryptocurrency activities and compared this data against Bitcoin’s price movements. They applied established readability assessments alongside machine-learning techniques to scrutinize the text within the disclosures. Among the companies analyzed, GameStop consistently produced the most detailed and highest-quality disclosures, according to Prof. Elitzur. Conversely, MicroStrategy’s disclosures were frequently rated below average in terms of readability compared to its peers. This company has since been implicated in a class action lawsuit for allegedly making misleading statements to investors and failing to disclose negative information about its operations.
Legal Implications of Unclear Disclosures
“It’s not surprising that vague or less transparent disclosure practices can lead to legal troubles or investor dissatisfaction, as illustrated by this lawsuit,” noted Prof. Elitzur. Until late 2023, there was minimal guidance on how companies should report their cryptocurrency activities, resulting in significant discrepancies between the reported values of digital assets and their actual market worth. However, the U.S. Financial Accounting Standards Board introduced ASU 2023-08, which mandated that cryptocurrency be represented at its fair market value, with relevant changes reflected in income statements. While these standards provided greater clarity, they also introduced increased volatility in earnings reports for companies heavily invested in cryptocurrency.
The Need for Improved Reporting Standards
Despite the clarity afforded by ASU 2023-08, the researchers assert that there is still a need for more stringent regulations to ensure investors receive higher-quality information. “Our findings indicate that the reporting standards concerning cryptocurrency activities should be further refined by establishing more specific and explicit disclosure requirements than those currently provided in ASU 2023-08,” emphasized Prof. Elitzur.
