The pros and cons of liquid staking tokens for digital asset treasury companies

Author: Steven Ehrlich Source: unchained Translation: Shan Ouba, Golden Finance

For years, MicroStrategy founder Michael Saylor vehemently opposed regulations from the Financial Accounting Standards Board (FASB) and other accounting bodies. He argued that his billions of dollars in Bitcoin holdings should be valued at market value. However, until 2024, his challenge remained unresolved. Due to an obscure accounting rule, he was required to adjust the valuation of his Bitcoin holdings downward during years or quarters with a downturn, but was unable to adjust it upward during upturns.

He ultimately succeeded in pushing for a rule change, but now Liquidity Staking Tokens (LST) are facing similar discriminatory treatment. The issue has escalated, forcing digital asset treasuries (DATs) that use LST to produce financial reports that inaccurately reflect their balance sheets.

As these companies strive to go mainstream and find ways to boost returns in an increasingly competitive market, the confusion surrounding accounting rules is likely to confuse investors. First, DATs want to use LSTs to boost returns, but the problem is: LSTs could hurt reported profits. Liquidity staking tokens (LSTs) can help cryptocurrency treasuries improve returns on their holdings, but supporters say the FASB's old guidance, which prohibits mark-to-market valuations, unfairly penalizes these companies. Currently, LST issuers manage over $104.5 billion in assets, making them an ideal tool for digital asset treasuries (DATs) looking to maximize returns on their balance sheets. However, an outdated accounting rule has made LSTs a problem. For DATs, LST is particularly attractive: it not only allows companies to earn base staking rewards but also generates additional income on top of them. A key differentiator and core advantage of liquidity staking is that it provides companies with liquidity—while earning staking rewards, they also gain access to other transactions through their LST tokens. A representative from Sharplink, an Ethereum DAT, told Unchained this. However, under the rules of the Financial Accounting Standards Board (FASB), the private organization that sets Generally Accepted Accounting Principles (GAAP) for US companies, these DATs cannot mark LST to market, meaning their balance sheets can only reflect declines in LST prices, not increases. This limitation is particularly problematic during a bull market like the current one: Over the past six months, the prices of major proof-of-stake tokens like Ethereum and Solana have risen by 186% and 104%, respectively (source: TradingView). DAT companies, which hold $31.4 billion worth of Ethereum and $2.98 billion worth of Solana, cannot reflect the appreciation of these tokens in their financial reports if they use LST. To make matters worse, accounting rules require them to use the lowest trading price of LST during the quarter as their valuation. This accounting treatment could cause significant investor confusion in the DAT industry: two DAT companies could have the exact same token holdings, but one using LST and the other not, and their income statements could be drastically different. DAT companies want to ensure that all companies' financial reports are comparable to avoid comparing apples and oranges. Alison Mangiero, head of staking policy and industry affairs at the advocacy group Crypto Innovation Council, stated that they are very concerned about establishing a unified standard for all participants. The industry is currently trying to push for a rule change, but the process could be lengthy, and even if government returns to normal operations, a rule change is far from certain. What is an "indefinite-lived intangible asset"? This awkward term is precisely the "shackles" that have hindered the development of LSTs. The definition of "indefinite-lived intangible assets" was first introduced in a June 2001 FASB announcement, which governed how "intangible assets acquired, whether alone or in combination with other assets, that are not physically tangible" should be accounted for in financial statements upon acquisition. It's no surprise to crypto enthusiasts that a rule, seven years older than the 2008 Bitcoin white paper, doesn't perfectly apply to crypto assets. For a time, companies holding Bitcoin or Ethereum were required to regularly test these assets for impairment. The general counsel of Alluvial, a staking services provider, stated that if an impairment was recognized, the valuation would have to be adjusted downwards; however, unless the asset was actually sold, the valuation couldn't be adjusted upwards, even if the market value subsequently recovered. However, the most noteworthy point in his statement is that this accounting treatment, as he stated, was designed for assets with indefinite lives, such as trademarks—not for digital assets that trade billions of dollars daily. In 2023, the FASB issued two standards, ASU-2023-08 and ASC-350-60, which adjusted the accounting treatment of digital assets like Bitcoin and Ethereum, allowing these tokens to be valued based on their current market capitalization. However, LST—essentially a token pegged to the price of Ethereum or Solana (rather than to fiat currencies like the US dollar or euro)—was excluded from this adjustment. Third, Better to Play It Safe: The Conservative Choice of DATs Due to the uncertainty surrounding accounting rules, DAT companies holding LST have little choice but to adopt a conservative accounting treatment—even if they believe it's unreasonable. After all, the risks are simply too great. We must complete our financial statements in accordance with US GAAP and submit them on time. The CEO of BTCS, an Ethereum treasury company that does not use LST, stated that if the company fails to complete reporting or delays submitting its 10-Q (quarterly report) or 8-K (significant event report), it will lose its S-3 registration eligibility—key to raising equity through "shelf offerings" (ATM) or "direct registered offerings." Once lost, this eligibility will be valid for up to one year. This penalty essentially prohibits the company from raising funds, which could be a fatal blow to any DAT—after all, in this increasingly competitive field, all participants are scrambling to raise funds. 4. How can the industry fight back? The industry generally believes that the FASB likely considered LST as an afterthought when formulating ASU-2023-08. Now, several companies have formed a coalition to try to push the FASB to issue relevant guidance or amend the rules. On August 25, the Council for Crypto Innovation (CCI) submitted a letter to the FASB and the Office of the Chief Accountant of the U.S. Securities and Exchange Commission (SEC), requesting clarification on how LSTs should be treated under standard ASC-350-60. The core argument of the letter is that LSTs are similar to "warehouse receipts" in traditional markets—Mangiello likened them to "clothing check certificates"—and share the same risk characteristics as the underlying assets. A key paragraph in the letter reads: "LSTs are transferable certificates representing ownership of pledged crypto assets, similar to warehouse receipts in traditional markets." The SEC has recognized this view in recent guidance, but the lack of clear accounting treatment standards has led to inconsistent approaches adopted by companies, resulting in differences in financial reporting. This inconsistency undermines comparability of reports and deprives investors of the consistent and decision-making information they need to assess a company's performance and risks. ”

Unchained contacted FASB for comment on this matter, and a spokesperson responded: As with all agenda requests, FASB will discuss the contents of this letter at a future meeting. Due to the US government shutdown, the SEC did not respond to Unchained's request for comment.

V. Different levels of risk: the complexity of LST accounting

For FASB, revising the relevant guidance on LSTs may seem simple and reasonable, but in practice it may face complex issues - the reliability and security of different LST issuers vary greatly, which means that some LSTs may be much riskier than stablecoins.

If you are working with a staking pool with low transparency and poor reputation, there may be counterparty risk - you cannot be sure whether you will eventually recover the expected full value or tokens. There may be a certain risk of loss at the counterparty level. Unfortunately, this requires subjective judgment to assess.

However, in the future, it is likely that more DAT companies will adopt LST. Kevin Huang, an advisor to Solana DAT company Sharps Technology, said in an interview that in the next few years, LST may account for as much as 50% of the company's treasury - this will lead to a huge discrepancy between the company's financial statements and the actual value of the token holdings.

As market saturation leads to a narrowing of stock premiums, companies are looking for ways to increase returns and revenue, and this discrepancy may become more obvious. It should be noted that the risk of LST may be higher than native staking: because LST can be further applied in the DeFi field, where hacker attacks are more frequent and risk management requirements are higher.

However, for DAT companies that hope to gain an advantage in the competition, using LST is a good choice. LST may be the only way out.