Coinbase provides a playbook for accounting for the cryptoeconomy

It takes a glossary of terms and some Big 4 advice, however, to make some sense of it all

Everybody is interested in the accounting for crypto. Here’s a newsletter edition that helps explain who is giving companies like Coinbase and Microstrategy - and maybe Tesla - advice. Thanks for reading, and if you want to subscribe, now’s the time. I’ve got a 2021 Summer Special!

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Coinbase plans to go public in late March in a direct listing on Nasdaq, the first major direct listing, an alternative to a traditional IPO, for that exchange. The prospectus, posted for the public on February 25, 2021, says Coinbase is the “leading provider of end-to-end financial infrastructure and technology for the cryptoeconomy.”

Coinbase will succeed if it can get investors to understand what that means. 

There’s a two-page glossary of terms in the S-1 that might help you talk, or write, about what Coinbase does and why you might want to buy its shares. Cold storage is not what you do with your ice-cream and a hot wallet is not what happens when you sit on yours while it’s in your back pocket.

Hodl on, I mean hold on, while I get into some funny, as in kind of strange not ha ha, things about this company’s accounting and auditing.

U.S. Generally Accepted Accounting Principles, or GAAP,  do not offer specific guidance for the accounting treatment of digital assets, whether a company is investing in them as Microstrategy and Tesla have done, or plans to accept them as payment as Tesla and others have said they would but have not yet done in a material way, or if you are offering payment services like Square does or if you are a crypto asset brokerage and providing other trading services like Coinbase is doing.

The Financial Accounting Standards Board, or FASB, decided at its October 21, 2020, meeting not to add a project on digital currencies to its agenda. Therefore, companies operating in this realm need good advice, the kind only a Big 4 global accounting firm will say it can provide.

When Zynga, with fellow new media company Facebook, started generating nearly all of its revenue from the sales of virtual goods more than ten years ago— FarmVille tractors and hay and Mafia Wars assault rifles — Zynga turned to its friend in the ­accounting business, Ernst & Young, its external auditor and Facebook’s.

In that case, Ernst & Young, then the third-largest accounting firm ­behind PricewaterhouseCoopers and Deloitte, wrote the book on accounting for virtual goods, literally. Neither the Financial Accounting Standards Board nor the Securities & Exchange Commission had yet “issued rules for the likes of livestock love potions and virtual harvesters.” That’s what I wrote for Forbes at the time.

So EY sketched out three revenue-recognition models it deemed consistent with Generally Accepted Accounting Principles. (EY has removed the 2010 version of the document. Here’s another discussion of it via an interview with an EY partner.  Here’s a link to the latest, after new revenue recognition rules because effective in 2018.) 

Zynga quoted from E&Y’s guide liberally and verbatim in its 2011 annual report when explaining why it recognized revenue from the sale of virtual “durables” like FarmVille tractors at a slow pace, and revenue from the sale of “consumables” like energy immediately. Significant discretion was left up to management when it came to interpreting the rules. E&Y basically made up the rules for the brand-new area and those rules drove the company’s results and stock price.

This time around the cryptoeconomy has its own go-to firm, Deloitte. MicroStrategy is practically running ads for the firm, and Deloitte features MicroStrategy’s bold moves to invest billions in Bitcoin prominently in its own write-ups, including a comprehensive guide for corporates investing in crypto. (KPMG is MicroStrategy’s auditor.)

Tesla uses the same language as MicroStrategy does when discussing its accounting treatment for its recent investment of $1.5 billion in Bitcoin. (It’s not known if Deloitte is consulting with Tesla. Tesla’s auditor is PwC.)

Deloitte says in the guide:

Companies must draw on various pertinent sections of US GAAP to facilitate accounting for digital assets.

That means companies should turn to the firm that can translate vague passages in accounting standards into what works for its clients and that has the credibility and market power to drive a critical mass of companies to “settle” on its template for accounting for digital assets like Bitcoin.

For investments in Bitcoin, for example, practice has so far “settled” on treating the investment as an indefinite-lived intangible asset, unless the company is required to apply specialized industry guidance, such as the guidance in ASC 946 Financial Services – Investment Companies. MicroStrategy is, frankly, on the verge of being an investment company given the growing dominance of its crypto investment on its business model.

Treating the investment as an intangible asset means it does not meet the accounting definition of cash or a cash equivalent, financial instrument, or inventory, Deloitte’s guidance says.

Needless to say, the accounting principles prevailing today were largely established at a time when digital assets were not yet even contemplated.

The section of Deloitte’s guidance for accounting for digital assets used in business transactions, such as paying vendors, is quite short.  That’s because these transaction “will require a different accounting treatment, which is more complex.”

When an intangible digital asset is used as a tangible one — a financial asset — the resulting financial reporting admittedly may not “align or make sense.” The financial reporting may instead be “misleading, rather than useful, to investors,” says Deloitte.

But don’t let that hold anyone back from doing it anyway and calling on Deloitte to figure it all out. Companies, and investors, may change their minds about what’s “settled” when the reality of recognizing impairments on the way down is not matched with recognizing gains on the way up, like equities. Just like fair value accounting for securities like mortgage backed securities, consensus often only lasts as long as values are going up or, in this case, not going down.

That said, Deloitte says “more and more mainstream financial services and fintech companies are now offering customers the possibility of holding or exchanging Bitcoin.”

Which brings us back to Coinbase.

Coinbase filed its first draft registration statement with the SEC on October 9, 2020. In that draft registration statement Coinbase disclosed that the company had changed independent registered public accounting firms on April 29, 2020 from Grant Thornton LLP to Deloitte & Touche LLP. The company also says the decision to change its independent registered public accounting firms was approved by the audit committee of its board of directors.

It’s not clear who was on the audit committee at that time. No one is identified as assigned to a board committee, in particular the Audit Committee.

The October 9, 2020 first draft filing has two audit opinions — one from Grant Thornton’s New York office for the year ending December 31, 2019 and one from Deloitte & Touche LLP’s San Francisco office for the six months ending June 30, 2020.

We have audited the accompanying consolidated Balance Sheet of Coinbase Global, Inc. (the "Company") as of June 30, 2020, the related consolidated statements of Operations, Comprehensive Income, Changes in Convertible Preferred Stock and Stockholders’ Equity and Cash Flows, for the six months ended June 30, 2020, and the related notes (collectively referred to as the "financial statements"). 

As a company with less than $1.07 billion in revenue during its most recently completed fiscal year, Coinbase at that time still qualified as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an EGC, it could take advantage of reduced disclosure and other requirements such as only providing two years of audited financial statements instead of three. At the time of the first draft, filed confidentially, there wasn’t even two full years of audited financial statements.

On December 21, 2020, Coinbase filed a revised confidential draft registration statement with the SEC. Still no one is identified to their board committees, in particular the Audit Committee. Dodds is still a director and Marc Andreessen is now a director as of Dec 2020.

Although the company warns that it will incur “significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act,” its independent registered public accounting firm is not required to formally attest to the effectiveness of its internal control over financial reporting commencing until its our second annual report on Form 10-K. The company’s management did not report any material weaknesses in its internal controls at this time.

A third revised confidential draft was filed on February 12, 2021. The company discloses that Christopher Dodds resigned from its board of directors in December 2020. No one yet assigned to a committee, in particular the Audit Committee. 

The Grant Thornton and Deloitte audit opinions have not changed and there no change in the company’s status as an EGC.

Thirteen days later, on February 25, 2021 the company’s public S-1 is posted on the SEC’s Edgar site. 

EGC status

The public S-1 indicates that the company’s EGC status has now changed. Coinbase went from a loss in 2019 to a profit of $322 million in 2020 on net revenue that more than doubled to $1.14 billion, according to the filing.

For the year ended December 31, 2020, the Company no longer met the requirements to qualify as an EGC. However, as the Company qualified as an EGC at the time it submitted a draft registration statement, the Company will continue to be treated as an EGC until the earlier of (1) the date on which we complete this listing and (2) December 31, 2021.

Dual-dated audit opinion

There’s now a very unusual item, a second date and reference to specific notes to the financials that have changed, on the Grant Thornton 2019 audit opinion.


We have served as the Company’s auditor from 2018 to 2020.

New York, New York

October 9, 2020 (except for Notes 2 and 6, as to which the date is February 25, 2021)

What is a dual dated audit opinion and why does it occur?

The Public Company Accounting Oversight Board, the entity that created auditing standards and regulates the audit industry, says in its standard, AS3110, paragraph .05:

The independent auditor has two methods for dating the report when a subsequent event disclosed in the financial statements occurs after the auditor has obtained sufficient appropriate evidence on which to base his or her opinion, but before the issuance of the related financial statements.

The auditor may use "dual dating," for example, "February 16, 20__, except for Note __, as to which the date is March 1, 20__," or may date the report as of the later date. In the former instance, the responsibility for events occurring subsequent to the original report date is limited to the specific event referred to in the note (or otherwise disclosed). In the latter instance, the independent auditor's responsibility for subsequent events extends to the later report date and, accordingly, the procedures outlined in AS 2801.12 generally should be extended to that date.

Dual-dating doesn’t happen every day with Big 4 audit firms, especially for audit opinions included in an S-1 of larger companies. Changing auditors so late in the game before an IPO is a bit unusual, too. There would have been no dual-dating necessary if Deloitte had come in and re-audited 2019 and then 2020.

That’s what happened at Snowflake, for example.

Snowflake was originally using Deloitte LLP as its auditor and the firm audited two pre-IPO years, fiscal 2019 and fiscal 2020, but never issued any reports or its opinions. (Snowflake has a January 31 year-end.) Then Snowflake dismissed Deloitte in November 2019, less than a year before its IPO last Wednesday.

Snowflake signed with PwC a month later in December 2019. PwC then re-audited fiscal 2019 and fiscal 2020. It must have cost Snowflake an awful lot to have PwC do those years over again. 

Snowflake’s new auditor PwC also had to dual-date its opinion to reflect additional disclosure requirements for a public company.

It may have been only that Coinbase decided to hire Deloitte and get audit and consulting on the accounting for all its crypto-related activities in one package. After all, the nature of the Coinbase business and the acquisition of Tagomi certainly creates a lot of complex accounting issues that a Big 4 firm leading the way on crypto accounting can help with.

Tagomi is an institutional brokerage for crypto assets and offers an end to end brokerage solution that caters to sophisticated traders and institutions. Tagomi operates an advanced trading platform which pools liquidity from multiple venues to offer efficient pricing, algorithmic trading, a suite of prime services (including delayed settlement and borrowing and lending of fiat currency and crypto assets), and a flexible account hierarchy and operational processes that meet the needs of institutional clients.

Deloitte certainly worked fast. Deloitte arrived, got GT to take another look at its 2019 opinion, and then signed the 2020 opinion on February 25 — the same day the S-1 was made public — in less than 10 months.

In addition to the reference in the dual dated signature to changes/additions in some footnotes as of February 25, 2021, the only change in the actual opinion from earlier drafts is a very subtle edit to the sentence that describes the standards followed by Grant Thornton when conducting its audit. In all the prior drafts the firm says it followed PCAOB standards and “auditing standards generally accepted in the United States of America.”

Now the last part of the sentence is gone. 

It may be that the October 9 Grant Thornton opinion is a later version, in anticipation of the potential IPO once Deloitte was on board. An earlier version, dated closer to the 2019 year end, may have been prepared that was more in line with a private company’s needs.

What’s changed in the footnotes?

Note 2 has lots of new goodies.

The note now has a section on reclassification of certain operating expenses for 2020. Prior-period amounts, 2019, were revised to conform with the current presentation which is great for comparability. It looks to be more in line with functional expense reporting. It’s only an estimate and, therefore, is considered for accounting purposes to be a change in accounting estimates, not a correction of an error.  

The changes had no impact on Coinbase’s previously reported consolidated net income (loss) for 2019, including total operating expenses, financial position, or cash flows. The refined methodology, the filing says, primarily allocated expenses out of general and administrative into technology and development, and sales and marketing.

Note 2 also includes a discussion of changes in accounts receivable and the allowance for doubtful accounts since June 30, 2020, numbers Deloitte audited as soon as it arrived and that were included in every draft until February 25. Prior to the final February 25, 2021 filing, the draft registration statements reflect balances as of June 30, 2020 audited by Deloitte and as of December 31, 2019 audited by Grant Thornton.

In earlier drafts Coinbase said its allowance for doubtful accounts was $0.6 million as of June 30, down from $4.3 million at the end of 2019. The decrease in the allowance for doubtful accounts, the company said, was “due to write-off of outstanding receivables that were fully reserved.”

The company’s policy is to book the expense to the allowance for doubtful accounts for receivables that are more than 90 days past due. If an account reaches 180 days past due and all collection efforts have been exhausted, the account is considered uncollectable, and the write-off is charged against the reserve in the allowance for doubtful accounts.

By February 25, the numbers had changed that they reflect balances audited by Deloitte as of December 31, 2021. It appears $1.6 million was added to the allowance for accounts since June 30 that went over 90 days past due.

As of December 31, 2020 and December 31, 2019, the Company recognized an allowance for doubtful accounts of $2.2 million and $4.3 million, respectively. 

Accounting for stablecoins

There was no mention until the February 25, 2021 final S-1 of an investment in USDC, “a fully collateralized US dollar stablecoin, based on the open source asset-backed stablecoin framework developed by Centre,” according to the website. Coinbase held $48.9 million and $88.4 million of USDC as of December 31, 2020 and December 31, 2019, respectively. 

The Coinbase filing reassures investors that the US dollars backing up this stablecoin “are held by the issuer at federally insured U.S. depository institutions and in approved investments on behalf of, and for the benefit of, holders of USDC.”

The USDC stablecoin is accounted for as a financial instrument with its onw line on the balance sheet. Coinbase says that one USDC can be redeemed for one U.S. dollar on demand from the issuer. This approach runs into the approach of categorizing investments in digital assets such as Bitcoin as intangible assets, subject to impairment. That may be because of the assumption that there is no volatility in the value of a stablecoin if it is exchangeable 1:1 to US dollars on demand.

However, that assumption ignores the additional risk in investing any digital asset and the real risk that stable coins are not sufficiently backed up by dollars to allow for on demand exchange at all times.

On February 23, 2021, New York Attorney General Letitia James ordered Bitfinex and Tether to end all trading activity with New Yorkers. Tether represented that each of its stablecoins were backed one-to-one by U.S. dollars in reserve. However, the New York Attorney General found that iFinex — the operator of Bitfinex — and Tether made false statements about the backing of the “tether” stablecoin, and about the movement of hundreds of millions of dollars between the two companies to cover up the truth about massive losses by Bitfinex.

Marc Hochstein wrote, “Tether Review Claims Crypto Asset Fully Backed – But There’s a Catch,” for Coindesk in June 2018:

“The bottom line is that an audit cannot be obtained,” [Stu Hoegner, Tether’s general counsel] told CoinDesk, claiming that this problem is not unique to his company but one faced by the entire cryptocurrency industry. He went on. “The barriers to getting audited are simply too big to overcome right now, and not just for us.”

Although FSS used different procedures than an auditor would, Hoegner said, he argued that the “key conclusions are similar to what an audit would generate” – a snapshot of bank balances at a point in time. But that highlights another issue with the FSS report: it covers only one such point in time, June 1.

Have things really changed that much in less than three years? Not really. The website says:

Centre stablecoins are issued by regulated and licensed financial institutions that maintain full reserves of the equivalent fiat currency. Issuers are required to regularly report their USD reserve holdings, and Grant Thornton LLP issues reports on those holdings every month.

(Grant Thornton would have been giving an opinion on its own audit opinion if it had stayed on as Coinbase auditor.)

The monthly opinion on the balances on Circle reports, specifically on Circle Internet Financial, Inc.’s assertion in its Reserve Account Report, is based on the criteria set forth in the Reserve Account Report. Except, as you can see with the latest, the report comes out more than a month after the balance date it is verifying. If dollars have disappeared, by then it’s too late.

In our opinion, the Reserve Account Information in the accompanying Reserve Account and Blacklisted Account Reports as of January 31, 2021 at 11:59 PM PT is correctly stated, based on the criteria set forth in the Reserve Account and Blacklisted Account Reports, in all material respects. The Notes to the Reserve Account and Blacklisted Account Reports are provided for additional information. Such information has not been subjected to the procedures applied in our examination, and accordingly, we do not express an opinion or provide any assurance on it.

New York, New York March 5, 2021

Circle is the creator of the core CENTRE technology and IP, and the CENTRE network’s founding member. USDC is a stablecoin brought to you by Circle and Coinbase.

Credit risk concentration

Note 2 also includes a discussion of Coinbase’s concentration of credit risk.

As of June 30, 2020 and December 31, 2019, no customer accounted for more than 10% of the Company’s accounts receivable or more than 10% of total revenue. As of June 30, 2020, Coinbase had two payment processors and one bank partner account that represented 20%, 14%, and 15% of accounts receivable, respectively. During the six months ended June 30, 2020 and June 30, 2019 (unaudited) and the year ended December 31, 2019, no customer accounted for more than 10% of total revenue.

Six months later, by December 31, 2020, some things had changed. As of December 31, 2020, the Company had one payment processor and two bank partner accounts representing 7%, 8%, and 7% of accounts receivable, respectively, a reduction in accounts receivable concentration for these business partners. 

As of June 30, 2020, Coinbase had only $3.7 million of a $41.8 million margin lending facility customers can use to purchase crypto assets on its platform utilized by customers. These loans were included in the accounts receivable balance as of June 30, 2020.

As of December 31, 2020 two customers now accounted for more than 10% of Coinbase’s accounts receivable or $65.5 million. The level of complexity in assessing and accounting for customer risk coincides with Coinbase’s acquisition of crypto prime broker Tagomi on July 31, 2020 and suggests we’ll see more of these types of arrangements in the future.

One customer had fiat of $45.0 million transferred to their platform account prior to December 31, 2020, but Coinbase had not yet settled the transaction by collecting payment. The Company had extended $20.5 million of post trade credit to the second customer as of December 31, 2020.

Coinbase said in the filing that these customers had transferred or were in the process of transferring funds to their portfolio equal to or in excess of the crypto assets purchased to act as collateral, so Coinbase did not record an allowance for doubtful accounts. There’s no update on the size or utilization of the overall margin lending facility.

Crypto asset balances

As of December 31, 2020, Coinbase says it holds $316.1 million in crypto assets, up from $33.9 million at the end of 2019. Impairment expense during the six months ended June 30, 2020 and the year ended December 31, 2019 was “insignificant,” the filing says.

Note 6, noted in the revised, dual-dated Grant Thornton opinion, is now a new chart giving a breakdown of the company’s accounts receivable balance. That’s all it is. Just a chart.

But you can see another note, telling us that there is another loan receivable that’s not the in-transit amount of $45.0 million transferred to a platform account prior to December 31, 2020, nor the $20.5 million of post trade credit. It’s another loan of $6.79 million that’s also supposed to be backed by collateral.  

I asked Coinbase to comment on the rationale for these additions/changes to the Notes and why Grant Thornton  hadn’t incorporated them in the audited 2019 financial statements. I also asked Coinbase to confirm which directors acted as the audit committee in April 2020 to approve the auditor change and why Coinbase changed auditors in the year leading up to its IPO.

A Coinbase spokesman responded that the company cannot comment on the specifics of the S-1 due to quiet period restrictions. 

If the changes and additions are the result of the SEC’s comments during the confidential filing process, we’ll get to see those soon.  They’ll be public around 20 business days after the registration was effective on Feb 25, or perhaps as soon as March 25.

I asked Grant Thornton why Coinbase dropped it for Deloitte and whether there was a referral to management via SAS 115 for a material weakness or significant deficiency in one or more ICFRs. I did not receive a reply to my request by press time.

I asked Deloitte why it didn’t just re-audit 2019 and take responsibility for the two years included in the S-1 rather than dealing with the dual dating requirement for Grant Thornton’s 2019 opinion.  I also asked Deloitte about whether the changes/additions in Notes 2 and 6 pointed to the need for a SAS 115 referral for a material weakness or significant deficiency in one or more ICFRs.

I also asked Deloitte why the $48 million investment in USDC, a stablecoin, being accounted for as a financial security rather than an intangible asset. I did not receive a reply to my request by press time.

Editors note: A chart depicting the statistics for dual-dated audit opinions since 2006 has been temporarily removed in order to update for additional instances that were not initially caught in my Audit Analytics downloads.

© Francine McKenna, The Digging Company LLC, 2020