The impact of liquid staking tokens on the advantages and disadvantages for digital asset treasury companies.

Author: Steven Ehrlich Source: unchained Translation: Shan Ouba, Jinse Finance

For many years, Michael Saylor, the founder of MicroStrategy, has strongly opposed the regulations of the Financial Accounting Standards Board (FASB) and other accounting institutions—he believes that the billions of dollars worth of Bitcoin he holds should be valued at market value. However, this request has not been permitted until 2024. Due to an obscure accounting rule, he has to reduce the valuation of his Bitcoin holdings during years or quarters of market downturns but cannot increase the valuation when the market is favorable.

Ultimately, he successfully pushed for changes to the rules, but now, liquid staking tokens (LST) are facing similar discriminatory treatment. This issue has gradually escalated: digital asset treasury companies (DAT) using LST are forced to issue financial reports that do not accurately reflect their balance sheets.

At present, these companies are striving to become mainstream, attempting to find ways to increase profits in an increasingly competitive market, and the chaos caused by accounting rules is likely to confuse investors.

1. DAT wants to use LST to enhance profits, but the problem is: LST may harm financial report profits.

Liquid Staking Tokens (LST) can help cryptocurrency treasury companies increase their holding returns, but supporters argue that the old guidance from FASB prohibits valuation at market value, which is unfairly penalizing these companies.

Currently, the assets managed by the LST issuer have exceeded 104.5 billion USD. For digital asset treasury companies (DAT) that hope to maximize returns through their balance sheets, LST should be an ideal tool.

However, an outdated accounting rule has turned LST into a troublemaker.

For DAT, the appeal of LST is particularly prominent: it not only allows companies to earn basic staking rewards but also generates additional earnings on top of that.

A key difference and core advantage of liquid staking is that it can provide liquidity for companies—while earning staking rewards, they can also participate in other transactions through the LST tokens they hold. This was stated by a representative of the Ethereum DAT company Sharplink in an interview with Unchained.

However, according to the rules of the Financial Accounting Standards Board (FASB) – a private organization that establishes Generally Accepted Accounting Principles (GAAP) for U.S. companies – these DAT companies are unable to value LST at market price, meaning that the balance sheet can only reflect the decline in LST prices and cannot show the increase in prices. This limitation is particularly pronounced in today’s bull market cycle: over the past six months, the prices of mainstream proof-of-stake tokens such as Ethereum and Solana have increased by 186% and 104%, respectively.

(Data source: TradingView).

For DAT Company, which holds 31.4 billion dollars worth of Ethereum and 2.98 billion dollars worth of Solana, using LST would mean they cannot reflect the appreciation of these tokens in their financial reports. To make matters worse, accounting rules require them to value LST at the lowest trading price within the quarter.

This accounting treatment may cause significant investor confusion in the DAT industry: two DAT companies have the same actual market value of token holdings, but one uses LST while the other does not, resulting in potentially stark differences in their income statements.

The DAT company hopes to ensure that all companies' financial reports have good comparability, avoiding situations where apples and oranges are compared together. The lobbying group “Crypto Innovation Committee” and its head of industry affairs, Alison Mangiero, expressed their strong concern about the issue of establishing unified standards for all participants.

Currently, the industry is trying to push for this rule modification, but this process may take a long time, and even if the government resumes normal operations, whether the rules can be modified is far from certain.

2. What is “indefinite-use intangible assets”?

This convoluted term is precisely the “shackle” that hinders the development of LST. The definition of “indefinite useful life intangible assets” first appeared in a statement issued by the FASB in June 2001, which aimed to standardize how “intangible assets acquired either individually or in combination with other assets, without a physical form” should be accounted for in financial statements upon acquisition.

For cryptocurrency enthusiasts, it is not surprising that a regulation established seven years before the release of the Bitcoin white paper (in 2008) cannot perfectly adapt to crypto assets. There was a time when companies holding Bitcoin or Ethereum needed to regularly test whether these assets were impaired, said the General Counsel of the staking service provider Alluvial. If impairment was confirmed, the valuation had to be lowered; however, unless the assets were actually sold, even if the market value subsequently rebounded, the valuation could not be increased.

However, the most noteworthy point in the statement is that this accounting treatment, as he mentioned, was originally designed for assets with indefinite useful lives, such as trademarks—not for digital assets with daily trading volumes reaching billions of dollars.

In 2023, the FASB issued ASU-2023-08 and ASC-350-60, making adjustments to the accounting treatment of digital assets such as Bitcoin and Ethereum, allowing these tokens to be valued at their current market value. However, LST—essentially a token pegged to the price of Ethereum or Solana (rather than fiat currencies like USD or EUR)—was excluded from this adjustment.

III. To be on the safe side, it's better not to do: A conservative choice for DAT

Due to the uncertainty of accounting rules, DAT companies holding LST have little choice but to adopt a conservative accounting approach— even if they internally believe this approach is unreasonable. After all, the risks are simply too great.

“We must complete the financial statements in accordance with U.S. GAAP standards and submit them on time.” The CEO of BTCS, an Ethereum treasury company that has not used LST, stated that if the report cannot be completed or if there is a delay in submitting the 10-Q (quarterly report) or the 8-K (major event report), the company will lose its S-3 registration qualification — a qualification that is key for our equity financing through 'shelf offerings' (ATM) or 'direct registered offerings'. Once lost, the validity period can last up to a year.

This penalty essentially prohibits the company's financing activities, which could be a fatal blow to any DAT—after all, in this increasingly competitive field, all participants are racing against time to raise funds.

4. How does the industry fight back?

The industry generally believes that the FASB, when formulating the ASU-2023-08 guidelines, likely only regarded LST as a factor for post-consideration. Now, multiple companies have formed an alliance and are trying to promote the issuance of relevant guidance or amendments to the rules by the FASB.

On August 25, the “Crypto Innovation Committee” (CCI) submitted a letter to the FASB and the Chief Accountant's Office of the SEC, requesting clarification on how LST should be treated under ASC-350-60. The core argument of the letter is that LST is similar to a “warehouse receipt” in traditional markets—Manguelo compares it to a “clothing storage receipt”—and has the same risk characteristics as the underlying asset.

A key part of the letter states: “LST is a transferable certificate representing ownership of staked crypto assets, similar to warehouse receipts in traditional markets. The SEC has recently acknowledged this viewpoint in its guidance, but due to the lack of clear accounting standards, the methods adopted by various companies are inconsistent, leading to discrepancies in financial reports. This lack of uniformity undermines the comparability of reports and deprives investors of consistent and decision-useful information needed to assess company performance and risks.”

“Unchained” contacted the FASB regarding this matter, and a spokesperson responded that, as with all agenda requests, the FASB will discuss the contents of the letter at future meetings. Due to the government shutdown, the SEC was unable to respond to “Unchained”'s request for comments.

5. Different Risk Levels: The Complexity of LST Accounting Treatment

For FASB, modifying the guidance related to LST seems simple and reasonable, but in practice, it may face complex issues — the reliability and security of different LST issuers vary greatly, which means that the risks of some LSTs may far exceed those of stablecoins.

If you are working with a staking pool that has low transparency and a poor reputation, there may be counterparty risk — you cannot be sure whether you will ultimately be able to recover the expected full value or tokens. At the counterparty level, there may be some risk of loss. Unfortunately, this requires relying on subjective judgment to assess.

You can think of LST as a derivative of Ethereum, with cbETH issued by Coinbase being a typical example — there exists a contractual right between you and Coinbase, allowing you to redeem the staked ETH at some point in the future. Therefore, it is no longer the asset itself, but rather a derivative of the asset.

(Note: There are indeed differences in trading prices for different LSTs - at the time of writing this article, the trading price of stETH was $4134, rETH was $4733, and cbETH was $4546. However, these price differences are more likely to reflect the differing yield structures of the tokens rather than the risk differences mentioned by Kowalski.)

6. Impact Still to Be Observed: Current Application Status of LST in DAT

Currently, the accounting issues raised by LST are more theoretical than practical - there are only three companies using LST: Sharplink (Ethereum ecosystem), EthZilla (Ethereum ecosystem), and DeFi Development Corporation (Solana ecosystem), and none of these companies have made LST a primary treasury management strategy.

However, in the future, it is very likely that more DAT companies will adopt LST. Kevin Huang, a consultant at Solana DAT company Sharps Technology, stated in an interview that in the coming years, the proportion of LST in company treasuries could reach as high as 50%—which will result in a huge discrepancy between the company’s financial statements and the actual value of token holdings.

As the market saturation leads to a narrowing of stock premiums, companies are increasingly seeking ways to enhance profits and increase revenues, and this disparity may become more pronounced. It is worth noting that the risks of LST may be higher than those of native staking: because LST can be further applied in the DeFi space, where hacking attacks are more frequent and the requirements for risk management are also higher.

But for those DAT companies that hope to gain an advantage in competition, using LST may be the only way out.