Accounting for Virtual Asset P2P (Peer-to-Peer) Exchanges

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Recently, P2P exchanges have been growing rapidly in the global market due to their decentralization and direct user-to-user transaction characteristics, and the volatility of related laws and regulations is also increasing. Accordingly, along with the rapid growth of P2P (Peer-to-Peer) exchanges, exchange operators are facing unique accounting requirements that are different from traditional financial institutions. Due to the structural characteristics of mediating direct transactions between users, various accounting treatments such as transaction processing methods, revenue recognition, and operating revenue recognition are becoming important for P2P exchanges. Accordingly, we will discuss accounting issues for virtual asset operators (exchanges).

1. Main types of virtual assets

There are two terms that refer to virtual assets: coins and tokens. Coins have a dedicated blockchain network, but tokens do not have a dedicated blockchain network and are created based on coins. In accounting guidelines for virtual assets, coins and tokens are not distinguished and are all described as ‘tokens.’

1) Utility Token: A token that represents the right to use a specific blockchain-based platform or application, or the right to access or use goods or services → Most types issued by companies.

2) Payment token: A token issued through distributed ledger technology that serves as a means of payment, remittance, or value.

It is used for transfer and is a form in which the holder cannot claim any rights against the issuer.

3) Token Securities (Security token): Securities under the Capital Market Act have been digitized using distributed ledger technology.

2. Accounting for Virtual Asset Exchanges (P2P)

For virtual asset exchanges, utility tokens, payment tokens, and token securities are all considered. The main accounting treatment and considerations are as follows.

1) Accounting for tokens entrusted by customers: In the case of tokens entrusted by customers held by a business, whether the business or the customer controls the tokens is determined by determining whether the business recognizes them as assets and liabilities. In cases where the liability aspect related to the business's obligation to return tokens to customers is given priority and recorded as assets and liabilities, the company's exchange price is applied and recorded as liabilities.

The judgment on control of economic resources is determined based on the following indicators.

① Private contract between business operator and consignee

㉠ Whether the rights, interests or legal ownership of the tokens are transferred to the business operator according to the contractual agreement.

㉡ Whether the business can sell, transfer, lend, pledge or provide as collateral the tokens deposited for the business's purposes without the consent or notice of the entrusted customer according to the contract;

㉢ Whether the consignment customer can transfer or withdraw the deposited tokens to another exchange or wallet at any time according to the contract

㉣ Whether there is a separate contract that affects the rights and obligations of the consignee and the business operator

㉤ Whether there are any restrictions imposed by the business operator when the consignment customer receives all economic benefits related to the token

㉥ Who benefits when a hard fork occurs?

② Laws and regulations that supervise business operators

㉠ Whether the laws applicable to business operators and consignment customers specify the owner of the tokens;

㉡ Whether the legal rights of the consignment customer exist in the event of bankruptcy, liquidation, or dissolution of the business (whether they are protected from the business's creditors, are not included in the bankruptcy estate, etc.)

㉢ Whether the legally entrusted customer has the ability to withdraw the deposited tokens at any time, and if not, whether he or she has the legal right to receive the deposited tokens.

2) Accounting for tokens held by business operators: In the case of tokens held by virtual asset business operators as “self-owned,” accounting is performed in accordance with the purpose of holding (business purpose) and business practices. If tokens are held and cannot be sold or brokered due to related regulations or other reasons, they are classified as intangible assets.

3) Accounting treatment when disposing of tokens held by a business: When presenting profit or loss in the financial statements upon disposal (transfer) to a third party, a judgment is made by considering whether it corresponds to the main business activity. Profit or loss arising from the main business activity is classified as operating profit or loss, and other cases are classified as non-operating profit or loss.

4) Accounting for deposit operating income and deposit usage fees: In the case of deposit operating income, accounting is performed as separate non-operating income. In the case of deposit usage fees (interest paid to customers), accounting is performed as separate non-operating expenses. In the case of general virtual asset operators (exchanges), since they are not subject to asset management business, accounting is performed as non-operating income and non-operating expenses as they are not considered to be the main business activities.

5) Non-recognition of customer deposit assets: P2P exchanges generally function as intermediaries between users and do not hold or accept virtual assets. However, if the platform holds assets through an escrow function for a certain period of time, it may be disclosed as a contingent liability or a commitment, depending on whether there is legal ownership and control.

6) Revenue Recognition: Revenue is recognized when the exchange has secured the right to receive the agreed fee at the time of transaction between customers. At this time, the medium of transaction may be cash, coins, or self-issued tokens.

7) Accounting for self-issued tokens: If you issue your own coins for purposes such as customer acquisition/reward, fee discounts, or community building, you must classify them as assets, liabilities, or capital items in accounting and cannot directly recognize them as revenue.

In the case of rewards and airdrops, they are classified as advertising expenses or non-operating expenses. However, if there are conditions corresponding to revenue, they are accounted for as unearned revenue or contractual liabilities as consideration paid to customers.

8) Accounting for deposits and reserve funds (dispute guarantee funds): P2P platforms operate risk guarantee or deposit systems to prepare for the possibility of disputes between users. The relevant assets are accounted for as current liabilities (deposits).

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