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Peer-Review Record

Determining the Appropriate Accounting Treatment of Cryptocurrencies Based on Accounting Theory

J. Risk Financial Manag. 2023, 16(9), 379; https://doi.org/10.3390/jrfm16090379

by Nicolette Klopper^* and Sophia Magaretha Brink^*

Reviewer 1: Anonymous

Reviewer 2: Anonymous

Reviewer 3: Anonymous

Reviewer 4:

J. Jumadi

J. Risk Financial Manag. 2023, 16(9), 379; https://doi.org/10.3390/jrfm16090379

Submission received: 22 June 2023 / Revised: 2 August 2023 / Accepted: 21 August 2023 / Published: 23 August 2023

(This article belongs to the Special Issue Financial and Sustainability Reporting in a Digital Era)

Round 1

Reviewer 1 Report

The paper submitted for review entitled 'Determining the appropriate accounting treatment of cryptocurrencies based on accounting theory' is very current, developed primarily based on The International Financial Reporting Standards and the International Accounting Standards Board's Conceptual Framework for Financial Reporting, and after incorporating several minor comments and observations, it is suitable for publication.

In the paper, I recommend adding a paragraph in the introduction about the history of cryptocurrencies, their origins, and development. I suggest adding this to the first paragraph of Chapter 1.

The paper is conducted from the perspective of the holders of cryptocurrencies and does not include the accounting of cryptocurrencies by cryptocurrency miners. I suggest mentioning in the paper that this could be the subject of further research and outline its approach.

The paper is generally on a high qualitative level, has the potential for use by other researchers, and is suitable for publication.

The paper only requires a minor language correction.

Author Response

Response to reviewers’ comments on ‘Determining the appropriate accounting treatment of cryptocurrencies based on accounting theory’

We thank the reviewers for useful comments and encouragement on our article. To respond efficiently and completely to all queries / comments we will structure this response by answering to the specific comments of each reviewer. We have made changes which we deem to be improvements to the article. We also confirm that the paper has been language edited by a member of the professional editors’ guild.

Reviewer comment #1:

In the paper, I recommend adding a paragraph in the introduction about the history of cryptocurrencies, their origins, and development. I suggest adding this to the first paragraph of Chapter 1.

Thank you for this comment. We have added the following to the Introduction of the article to address this comment:

The first cryptocurrency, Bitcoin, was developed in 2009 by a person or group of people operating under the pseudonym Satoshi Nakamoto. The 2008 financial crisis underlined the need for an alternative to the traditional banking system, which served as inspiration for the development of Bitcoin. Ethereum, introduced in 2015 by Vitalik Buterin, pioneered the concept of smart contracts, allowing for the development of decentralized applications on its blockchain. Thousands of alternative cryptocurrencies have subsequently emerged as a result of the success of Bitcoin and Ethereum (Hyson and Ancrum 2003; Marr 2017).

Additional reference included:

Hyson, P., and Ancrum, S. 2023. Crypto Defined: The History of Cryptocurrency, Top Currencies and Interesting Facts. Miami Herald. Available online: https://www.miamiherald.com/software-business/article274162810.html (accessed on 19 July 2023).

Marr, B. 2017. A Short History of Bitcoin And Crypto Currency Everyone Should Read. Available online: https://www.forbes.com/sites/bernardmarr/2017/12/06/a-short-history-of-bitcoin-and-crypto-currency-everyone-should-read/?sh=30afc5c83f27 (accessed on 21 July 2023).

Reviewer comment #2:

We agree with this suggestion, and we made the following adjustment to the Conclusion section of the article:

The scope of this study excluded the accounting of cryptocurrencies by miners of cryptocurrencies. As an area for future research, accounting theory can be applied to determine an appropriate accounting treatment for mentioned cryptocurrencies.

Other improvements made:

We have expanded the explanation of the method in the article. Please see the following changes made:

Abstract: This qualitative study conducted a non-empirical interpretative analysis of literature (focussing specifically on accounting theory) to address the research aim.

Methods:

To provide guidance on the appropriate accounting treatment of cryptocurrencies, accounting theory needs to be considered. This study was therefore non-empirical and guided by the principles of conceptual research (Jaakkola 2020; Hirschheim 2008). The researchers decided on a qualitative approach because it allows them to think about how processes change over time and respond to new problems and concepts as they arise. The approach entails compiling in-depth, descriptive data on a particular phenomenon or situation (Simon 2011). There are various qualitative data collection methods available, including audio-visual materials, interviews, observations, and document analysis (Creswell 2013).

Document analysis, which is based on a study of the literature on a specific topic, enables the researcher to understand problem areas, analyse linkages between different accounting rules, and even predict future developments. Document analyses also provides a systematic exposition of the accounting rules pertaining to cryptocurrencies (Hutchinson and Duncan 2012). A document analysis process, which is doctrinal in nature, was therefore used to obtain and analyse the relevant data (Hutchinson and Duncan 2012).

Additional references included:

Creswell, J.W. 2013. Qualitative inquiry and research design: Choosing among five approaches. London: SAGE.

Jaakkola, E. 2020, Designing conceptual articles: Four approaches. Academy of Marketing Science Review (10): 18–28.

Hirschheim, R. 2008. Some guidelines for the critical reviewing of conceptual papers, Journal of the Association for Information Systems 9(8): 432–441.

Simon, C.E. 2011. Exploring the contemporary ethical challenges in coaching psychology in South Africa, Unpublished master’s dissertation, University of Johannesburg, Johannesburg South Africa.

Reviewer 2 Report

The article entitled Determining the appropriate accounting treatment of cryptocurrencies based on accounting theory addresses an interesting topic. However, certain issues must be improved.

Abstract – The authors have to clarify methods and results of the study Do you have any hypothses of study?

Introduction – Has the topic been addressed before? Is there a need for such a study?

The Conclusions are extremely vague, they should get more consistency, underlining the added value of the paper.

Overall, the paper seems to be very theoretical, somehow lacking a really practical part, which would represent the personal contribution of the authors. Is the included figure taken from a particular source or is it the authors’ contribution?

Author Response

Response to reviewers’ comments on ‘Determining the appropriate accounting treatment of cryptocurrencies based on accounting theory’

Reviewer comment #1:

Abstract – The authors have to clarify methods and results of the study. Do you have any hypothses of study?

Thank you for this comment. The researchers decided against adding a research (hypo)thesis, as a qualitative approach was followed. We however decided to expand the explanation of the method in the article. Please see the following changes made:

Abstract: This qualitative study conducted a non-empirical interpretative analysis of literature (focussing specifically on accounting theory) to address the research aim.

Methods:

Additional references included:

Creswell, J.W. 2013. Qualitative inquiry and research design: Choosing among five approaches. London: SAGE.

Jaakkola, E. 2020, Designing conceptual articles: Four approaches. Academy of Marketing Science Review (10): 18–28.

Hirschheim, R. 2008. Some guidelines for the critical reviewing of conceptual papers, Journal of the Association for Information Systems 9(8): 432–441.

Simon, C.E. 2011. Exploring the contemporary ethical challenges in coaching psychology in South Africa, Unpublished master’s dissertation, University of Johannesburg, Johannesburg South Africa.

Reviewer comment #2:

Introduction – Has the topic been addressed before? Is there a need for such a study?

We agree with this comment. This should be very clearly stated. Please refer to the following adjustment made in the Introduction to the article:

Despite literature's emphasis on the value of accounting theory in the process of scholarly accounting activity (Deegan and Unerman 2006; Inanga and Schneider 2005; Van der Schyf 2008), no research addressing the problem of cryptocurrencies using accounting theory could be found. This emphasises the need for the current study.

Reviewer comment #3:

The Conclusions are extremely vague, they should get more consistency, underlining the added value of the paper. Overall, the paper seems to be very theoretical, somehow lacking a really practical part, which would represent the personal contribution of the authors.

Thank you for this comment. We agree that the primary contribution of the paper is theoretical, but this theoretical contribution is significant and important as highlighted by Mouton (1996) and Van der Schyf (2008). To show the practical contribution more clearly the following adjustments were made:

This study also offers practical assistance to stakeholders in understanding the theory behind the practice of accounting for cryptocurrencies which is considered very important according to literature (Deegan and Unerman 2006; Riahi-Belkaoui 2004).

For the first time entities holding investments in cryptocurrencies have clear guidance on how to faithfully account for and present such investments in their financial statements.

The guidance developed could also be utilised by future researchers to evaluate the accounting treatment of cryptocurrencies in practice. Auditors could apply the guidance in assessing the appropriateness of accounting for cryptocurrencies.

Reviewer comment #4:

Is the included figure taken from a particular source or is it the authors’ contribution?

The figure is the authors’ contribution. A source (Figure created by authors) was added.

Other improvements made:

We have expanded the Introduction to the article. Please see the following changes made:

The following additional references have been added to the article.

Australian Accounting Standards Board. 2016. Digital currency - A case for standard setting activity. Australian Government.

Creswell, J.W. 2013. Qualitative inquiry and research design: Choosing among five approaches. London: SAGE.

Hirschheim, R. 2008. Some guidelines for the critical reviewing of conceptual papers, Journal of the Association for Information Systems 9(8): 432–441.

Jaakkola, E. 2020, Designing conceptual articles: Four approaches. Academy of Marketing Science Review (10): 18–28.

Mlambo, T. 2022. Accounting of cryptocurrencies in terms of IFRS. Dissertation, University of Johannesburg, Johannesburg, South Africa.

Nurahma, F. 2023. Challenges of cryptocurrencies to accounting and accountants’ readiness. Dissertation, Universitas Kristen Satya Wacana Salatiga, Indonesia.

PricewaterhouseCoopers. 2019. Cryptographic assets and related transactions: accounting considerations under IFRS. Available online: https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-16/cryptographic-assets-related-transactions-accounting-considerations-ifrs-pwc-in-depth.pdf#:~:text=Unless%20crypto%20tokens%20provide%20the,9%2C%20'Financial%20Instruments'. (accessed on 24 July 2023).

Raiborn, C., and Sivitanides, M. 2015. Accounting Issues Related to Bitcoins. Journal of Corporate Accounting & Finance 26(2): 25-34.

Ram, A., Maroun, W., and Garnett, R. 2016. Accounting for the Bitcoin: accountability, neoliberalism and correspondence analysis. Meditari Accountancy Research 24 (1): 2-35.

Simon, C.E. 2011. Exploring the contemporary ethical challenges in coaching psychology in South Africa, Unpublished master’s dissertation, University of Johannesburg, Johannesburg, South Africa.

Sundqvist, E. and Hyytiä, P. 2019. Accounting for Cryptocurrencies – A Nightmare for Accountants. Dissertation, Umea University, Umea, Sweden.

Tan, S.T., and Low, K.Y. 2017. Bitcoin - Its Economics for Financial Reporting. Australian Accounting Review 81(2), 220-227.

Yilmaz, N.K. and Hazar, H.B. 2018. Predicting future cryptocurrency investment trends by conjoint analysis. Journal of Economics, Finance and Accounting 5(4): 321-330.

Reviewer 3 Report

Review: Determining the appropriate accounting treatment of cryptocurrencies based on accounting theory

The authors examine the accounting for cryptocurrencies and propose an accounting treatment based on accounting theory in contrast to the IASB’s current method. I think the authors have done a good job describing the accounting issues surrounding cryptocurrencies. They also provide a good discussion of why the current IASB treatment is inadequate, especially with respect to an overall accounting conceptual framework.

My suggestions would be to provide additional discussion initially about digital assets in general. It would be interesting to determine if the arguments in this paper apply to only cryptocurrencies, or if crypto tokens that operate on existing block chains would fall under the same suggested accounting treatment. In addition, with more countries examining the idea of centralized digital currencies (CDC) the authors may want to address the issues surrounding CDC.

1. Numerous times the authors switch between "This study..." and "The study..." making the reader wonder if they are discussing another research paper or something else entirely. For example, the first line in the 2. Methods: "The study entailed a non-empirical..."

2. The authors should stick to the present tense when writing. For example, the first line in the 2. Methods: "The study entailed a non-empirical..." Sometimes the authors use present tense to describe and sometimes the past tense.

Author Response

Response to reviewers’ comments on ‘Determining the appropriate accounting treatment of cryptocurrencies based on accounting theory’

Reviewer comment #1:

My suggestions would be to provide additional discussion initially about digital assets in general. It would be interesting to determine if the arguments in this paper apply to only cryptocurrencies, or if crypto tokens that operate on existing blockchains would fall under the same suggested accounting treatment. In addition, with more countries examining the idea of centralized digital currencies (CDC) the authors may want to address the issues surrounding CDC.

Thank you for this interesting comment. Cryptocurrencies and crypto tokens are both digital assets that leverage blockchain technology, but they have fundamental differences in terms of their purpose, functionality, and underlying infrastructure. To apply the conceptual framework to determine the appropriate accounting treatment of a transaction, a broad understanding of the economic phenomenon is required (IASB 2018) and this would include the purpose, functionality, and underlying infrastructure of the transaction. Including crypto tokens in this study would have caused the scope of the study to be too wide (bearing in mind that the article is already more than 9 000 words). Including crypto tokens would require opening a can of worms just considering the different types of crypto tokens available (utility tokens, security tokens and asset tokens) and the fact that there are different rights attached to tokens depending on the smart contract.

As we believe this is a valid comment and worth investigating, we included this as a recommendation for future research. Please see adjustment made in the Conclusion section.

In addition, it is recommended that the accounting treatment of other digital assets for example crypto tokens that operate on existing blockchains be investigated.

Centralized digital currencies (CDC) also differ from decentralized cryptocurrencies in that CDC operate on centralized systems, meaning that the issuance, distribution, and validation of transactions are overseen and managed by a central authority (e.g. the government or a financial institution) holding a significant degree of control over the currency's supply, governance, and monetary policy. Compared to decentralized cryptocurrencies where the issuance and transaction validation are carried out by a decentralized network of computers using cryptographic algorithms. In addition, cryptocurrencies are not regulated by any government or legal entity. Once again including a discussion on CDC would have caused the scope of the study to become too wide.

Reviewer comment #2:

Numerous times the authors switch between "This study..." and "The study..." making the reader wonder if they are discussing another research paper or something else entirely. For example, the first line in the 2. Methods: "The study entailed a non-empirical..."

Thank you for this comment. We made the necessary adjustments throughout the article to correct this mistake and avoid confusion.

Reviewer comment #3:

The authors should stick to the present tense when writing. For example, the first line in the 2. Methods: "The study entailed a non-empirical..." Sometimes the authors use present tense to describe and sometimes the past tense.

The article was reviewed to ensure that the correct tenses were used throughout.

Reviewer 4 Report

This manuscript presents an interesting topic but not ready as a scientific article. I suggest some improvements:

1. The state of the art and the contributions are not well highlighted.

2. The methods is unclear.

3. The results contain almost no data, just like a review paper.

4. Please use the journal template when preparing article.

Minor editing is needed.

Author Response

Response to reviewers’ comments on ‘Determining the appropriate accounting treatment of cryptocurrencies based on accounting theory’

Reviewer comment #1:

The state of the art and the contributions are not well highlighted.

Thank you for this comment. Please see adjustments made to clearly show the contribution of the article.

Conclusion:

For the first time entities holding investments in cryptocurrencies have clear guidance on how to faithfully account for and present such investments in their financial statements.

It was made clear that Figure 1 was created by the authors - a source “Figure created by authors” was added. This figure created by the authors contributes to accounting knowledge.

Reviewer comment #2:

The methods is unclear.

We agree with this comment and expanded the explanation of the method in the article. Please see the following changes made:

Abstract: This qualitative study conducted a non-empirical interpretative analysis of literature (focussing specifically on accounting theory) to address the research aim.

Methods:

Additional references included:

Creswell, J.W. 2013. Qualitative inquiry and research design: Choosing among five approaches. London: SAGE.

Jaakkola, E. 2020, Designing conceptual articles: Four approaches. Academy of Marketing Science Review (10): 18–28.

Hirschheim, R. 2008. Some guidelines for the critical reviewing of conceptual papers, Journal of the Association for Information Systems 9(8): 432–441.

Simon, C.E. 2011. Exploring the contemporary ethical challenges in coaching psychology in South Africa, Unpublished master’s dissertation, University of Johannesburg, Johannesburg South Africa.

Reviewer comment #3:

The results contain almost no data, just like a review paper.

In line with a document analysis qualitative method, findings (and not results) are presented.

Primary sources of information were identified and studied, relevant accounting theory requirements were considered and analysed, pertinent issues pertaining to accounting for cryptocurrencies were synthesised, and sound and effective conclusions were drawn (Hutchinson and Duncan 2012). The target material that was consulted was the relevant accounting theory.

The findings contain the data obtained, analysed and synthesised as described in the Method section.

Reviewer comment #4:

Please use the journal template when preparing article.

Thank you for this comment. We received an invitation to submit an article to JRFM with a given deadline. When submitting the article, the authors were offered the choice to submit the article in any Word format or to make use of the template. Under time constraint we unfortunately did not prepare the article using the template. This will be done once the article is accepted for publication.