Understanding the AICPA’s Proposed Reporting Framework for Stablecoins

At a glance:

• The main takeaway: AICPA aims to establish standardized guidelines for financial reporting for issuers of stablecoins.
• The impact on your business: For stablecoin issuers, this proposed framework will provide enhanced reporting clarity. We recommend any impacted companies to review the proposal and submit feedback to the AICPA.
• Next steps: Navigate the complexities of stablecoins, cryptocurrency and blockchains with help of our Blockchain Accounting Services and Advisory Team.

Schedule a consultation with Aprio’s Blockchain Advisory Team today.

The full story:

As the landscape of digital currencies evolves, the American Institute of CPAs (AICPA) continues to play a pivotal role in developing frameworks and standards to address emerging financial sectors. The AICPA has released its proposed criteria to enhance the consistency and transparency of assurance reporting disclosures for asset-backed fiat-pegged tokens (Stablecoins). Currently there are no definitive requirements for specific disclosure reporting which has led to reporting inconsistency amongst token issuers.

Fiat-pegged tokens typically include mechanisms built into their design which limit the volatility of the token, such as pegging a token 1:1 against USD or some other major currency. These tokens can then be redeemed into their native asset. For example, USDC (issued by Circle) enables users to switch between USD fiat currency and USDC tokens at a ratio of 1:1.

The mechanism for maintaining confidence in a stablecoin and encouraging its use is similar to the proto-fractional reserve system employed by banks under the gold standard. The implicit contract built into every token comes with a guarantee that the token’s holder can easily redeem it for an equal amount of its native currency or asset, meaning the stablecoin’s issuer must keep enough assets on hand to redeem any and all outstanding tokens at any time. These assets may be any combination of asset classes including cash, cash equivalents and other relatively liquid assets.

Stablecoin issuers do not benefit from FDIC deposit insurance or any other mechanisms meant to prevent bank runs and enable relatively low reserve ratios. Users and stakeholders of stablecoins typically demand at least a 1:1 ratio between outstanding redeemable tokens and assets held by the stablecoins’ issuers. Promises and occasional disclosures aren’t enough to generate confidence that a stablecoin’s issuer has assets equal to or in excess of the outstanding tokens.However,  increasing consumer pressure has been put on assurance providers to disclose the actual asset ratios absent any formal frameworks for facilitating transparent reporting.

The proposed framework emphasizes the importance of transparent and consistent financial reporting, providing investors, regulators and stakeholders with a clearer understanding of the stability, nature of the assets backing the stablecoins and risk management practices employed by issuers.

The three criteria and disclosures that have been proposed are as follows:

1) Token Issuer Redeemable tokens outstanding and related disclosures

2) Redemption Assets available to redeem redeemable tokens outstanding and related disclosures

3) Comparison of the balance of redemption assets available to redeem tokens and the token issuer’s redeemable tokens outstanding and related disclosures

The focus is on reporting on the sufficiency of cash, cash equivalents or other assets for redeeming outstanding asset-backed fiat-pegged tokens in accordance with the token issuer’s terms at a specific point in time.

The AICPA invites feedback from industry professionals, stakeholders and interested parties regarding the proposed criteria. This presents a valuable opportunity for our clients and stakeholders to contribute to the development of these standards, ensuring they reflect the diverse perspectives and needs of the industry.

To review the AICPA’s proposed framework and submit feedback, you can visit the official AICPA webpage here.

As your trusted advisors, we encourage you to take part in this important initiative by providing your insights and feedback. Your contributions will help shape the future of stablecoin reporting standards, ultimately fostering a more transparent and resilient digital currency ecosystem. Aprio will also be drafting and submitting our opinion to the draft framework.

Aprio’s Blockchain Accounting and Advisory team can help navigate the ever-evolving cryptocurrency and financial landscape. Schedule a consultation with Aprio’s Blockchain Advisory Team today.

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