The FSS Now Requires the Footnote Disclosure for Cryptocurrencies and Stablecoins

[Executive Summary]

• The Financial Supervisory Service has announced guidelines to include cryptocurrencies and stablecoins under the footnote disclosure requirement. According to such requirements, companies holding cryptocurrencies must disclose specific information in the footnotes of their financial statements. However, non-fungible tokens (“NFT”) and central bank digital currencies (“CBDC”) are expected to be exempt from the disclosure requirements. The announced guidelines are modelled after the European Union’s Markets in Crypto-Assets Regulation (MiCA). Notably, the FSS has determined that market value should be considered fair value in cryptocurrency accounting. However, the disclosing company may choose an exchange and its market price, and the exchange may be either domestic or a foreign exchange. The footnote disclosure must include the characteristics of the cryptocurrency, obligations of the developer, maximum volume according to the white paper, and other relevant information.

The Financial Supervisory Service (“FSS”) has decided to include cryptocurrencies and stablecoins, such as Bitcoin and Ethereum, under the footnote disclosure requirement. Non-fungible tokens (“NFT”) and central bank digital currency (“CBDC”) are not included at this time.

An official of the institution commented that NFT and CBDC are not included since there has not yet been a consensus definition for NFTs, and CBDCs are a de facto currency issued by a central bank rather than a virtual asset. The official also added that the announced guidelines took reference from the European Union’s Markets in Crypto-Assets Regulation (MiCA) to promote best practices among companies and enhance the understanding of information for consumers.

The FSS has defined the fair value standard used in accounting for cryptocurrency as “market value,” which must follow the market price of domestic and foreign exchanges. In addition, considering that cryptocurrency is traded 24 hours a day, the market price at a specific point in time will be applied. However, it allows companies to choose which exchange to use and how many exchanges to refer to, so long as the reason for choosing a specific exchange and the name of the exchange are disclosed.

In addition, the required information for the developer’s footnote disclosure includes:  characteristics of developed cryptocurrency, developer obligations, current status of selling and holding cryptocurrency, the total volume of cryptocurrency issued (at the time of development completion/end of the current period), changes in the information stated in the white paper such as the change in the amount of cryptocurrency being issued, the maximum number of issuances, etc., the quantity of the developed cryptocurrency held out of the total quantity, the start and end date of exchange transaction support for the developed cryptocurrency.

The requirements for footnote disclosure are primarily focused on accounting, financial statements, and auditing. Companies must also provide technical information and cryptocurrency volume, according to the new guideline. The interpretation of market pricing and fair value may also provide problems. The FSS is required to communicate new policies and best practices as well as continue to build the legal framework. Follow our blog to have the latest update on more specific guidelines released by the FSS.

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