DeFi & Digital Asset Valuation Flashcards

When a company participates in a DeFi lending protocol by depositing collateral and borrowing another token, how should the auditor classify the borrowed tokens on the balance sheet?

Answer: As a liability at fair value, representing an obligation to return the borrowed asset

Borrowing tokens creates an obligation to return them; the entity must record a liability reflecting the fair value of its repayment obligation, with the collateral separately classified as a pledged asset.

An auditor is assessing the valuation of a company's position in a DeFi protocol that has been hacked, causing the native token to drop 80%. Under the CCA exam framework, which risk does this scenario most clearly illustrate?

Answer: Smart contract risk leading to material impairment of a digital asset holding

An 80% drop triggered by a hack directly illustrates smart contract risk — a code vulnerability was exploited, destroying most of the protocol's value and creating a material impairment event for holders.

For a crypto mining company, how should newly mined cryptocurrency rewards be initially recognized on the income statement?

Answer: As revenue at fair value on the date each block reward is received

Mined cryptocurrency rewards should be recognized as revenue at their fair value on the date received, as the mining company has provided a service (transaction validation) and earned the reward.

What is the key audit risk when a company values its DeFi token holdings using prices from a DEX with very low trading volume?

Answer: Prices on thin DEX markets can be easily manipulated, resulting in materially misstated asset values

Thin DEX markets are highly susceptible to price manipulation through wash trading or large single trades, meaning a quoted price may not represent true fair value and could materially overstate assets.

Which disclosure is most critical for a public company holding significant cryptocurrency assets under SEC reporting requirements?

Answer: Accounting policy for cryptocurrency measurement, significant price volatility risks, and concentration of holdings by asset type

SEC guidance requires disclosure of the accounting policies applied, material risks from price volatility, and concentration risks that could materially affect the financial statements.

A company converts $1M of Bitcoin (held for 18 months) into USD to pay operating expenses. For U.S. tax purposes, how is this gain classified?

Answer: Long-term capital gain taxed at preferential rates since the holding period exceeds 12 months

Under IRS rules, Bitcoin held for more than 12 months qualifies for long-term capital gain treatment when sold or exchanged, regardless of what the proceeds are used for.