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VideoWhen Digital Assets Exist but Markets Don’t: Practical Valuation Considerations Under ASU 2023-08
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The growing presence of digital assets is introducing new challenges for finance teams in how these assets are measured, reported and governed. As annual audit season concludes, CFOs, controllers and finance leaders are reassessing their processes and internal controls to ensure smoother, repeatable compliance with U.S. GAAP, particularly in areas where accounting guidance has recently shifted.
One such shift came with ASU 2023‑08 (Subtopic 350‑60), which introduced a fundamentally different accounting model for crypto assets. Effective for fiscal years beginning after December 15, 2024, the update has required companies to measure certain “in‑scope” crypto assets at fair value, with changes in fair value recognized directly in net income.
For organizations holding digital assets that lack deep, orderly markets, this shift has real implications for earnings volatility, valuation governance and audit scrutiny, making it an issue squarely within the purview of senior finance leadership.
Before discussing the valuation challenges that arise, particularly for Level 3 digital assets, it is important to first understand which crypto assets fall within the scope of ASU 2023‑08.
In‑Scope Criteria for Crypto Assets under ASU 2023‑08 (ASC 350‑60‑15‑1)
| ASC Requirement | |
|---|---|
| The crypto asset meets the U.S. GAAP definition of an intangible asset | The asset has value, is controlled by the entity, has no physical form and does not represent a contractual right to receive cash or another financial asset. |
| The holder does not have “enforceable rights to or claims on underlying goods, services, or other assets.” | Ownership does not grant cash flows, goods, services or an equity like interest in an entity or project. |
| The asset is created or resides on “a distributed ledger based on blockchain or similar technology.” | The asset exists on decentralized ledger technology, the foundational infrastructure of cryptocurrencies. |
| The asset is secured by cryptography | Ownership and transfer are protected using encryption, enabling verification without a central authority. |
| The asset is fungible | Each unit is interchangeable with another identical unit (e.g., one Bitcoin is equivalent to another Bitcoin). |
| The asset is “not created or issued by the reporting entity or its related parties” | The reporting entity (and its affiliates) did not issue or create the token.
*Additional clarification: ASU 2023 08 specifies that crypto assets received through mining or validating transactions remain in scope, provided the reporting entity did not create the underlying protocol or token. In these situations, miners and validators are viewed as receiving compensation for services rather than issuing the crypto asset itself. |
For finance leaders, these criteria serve as the first gatekeeping step, determining whether a crypto asset must now be measured at fair value or remains outside the scope of the new guidance.
Digital Assets and Fair Value Measurement under ASC 820
If a crypto asset qualifies as in scope under ASU 2023‑08, it must be measured at fair value at each reporting date. FASB directs entities to apply the existing fair value framework detailed in ASC 820. To improve consistency and transparency, the guidance establishes a three‑level hierarchy based on the observability of the inputs used in valuation. From a governance perspective, the fair value hierarchy is more than a disclosure requirement, it directly influences valuation methodologies, documentation standards and the degree of audit scrutiny applied.
Fair Value Hierarchy for Digital Assets under ASC 820
| Fair Value Level | |||
|---|---|---|---|
| Level 1: Quoted prices in active markets | Applies when the digital asset is actively traded on established exchanges with sufficient volume, depth and readily available pricing from a principal market | Widely traded cryptocurrencies such as Bitcoin or Ethereum | Minimal judgment required; prices can be directly observed without adjustment |
| Level 2: Observable inputs other than quoted prices | Applies when trading activity exists but is not sufficiently robust to qualify as an active market or when pricing requires modest adjustments for liquidity, exchange differences or market fragmentation | Digital assets traded primarily in over the counter markets or on smaller exchanges with observable but inconsistent pricing | Requires corroboration and normalization of observable inputs; assets may migrate to Level 3 as liquidity deteriorates |
| Level 3: Unobservable inputs | Applies when markets are inactive or illiquid, observable pricing is unavailable or unreliable, or the asset is subject to restrictions such as lockups or vesting | Restricted tokens or tokens acquired prior to commencement of trading | Highest level of judgment and audit scrutiny; often necessitates valuation specialists due to earnings impact |
Key Valuation Considerations for Level 2 and Level 3 Digital Assets
While ASU 2023‑08 and ASC 820 establish the framework for fair value measurement, they do not eliminate judgment. For finance professionals overseeing digital asset accounting, valuation risk often arises not from the standard itself but from how real‑world market dynamics are incorporated into fair value conclusions.
There are several recurring issues that drive the most significant valuation and audit challenges:
Consideration of failure risk
Weaver’s digital asset valuation team recently observed that more than 75 percent of stablecoins listed on CoinMarketCap could be characterized as failures, based on sustained loss of peg, lack of meaningful liquidity or structural deficiencies. This figure does not capture stablecoins that failed prior to exchange listing or were subsequently delisted, suggesting the true failure rate may be materially higher.
High‑profile examples such as TerraUSD (UST), which lost substantially all value in 2022 after losing its dollar peg, and Iron Finance’s TITAN stablecoin, which rapidly declined from a multi‑billion‑dollar valuation to near zero, illustrate how quickly assets perceived as low risk can experience near-total impairment.
Although stablecoins are designed to maintain price stability, historical evidence suggests they may exhibit higher failure risk than more mature cryptocurrencies. Importantly, this risk dynamic extends beyond stablecoins and is inherent in many types of Level 2 and Level 3 crypto assets.
Nature of prior transactions and information asymmetry
ASC 820 defines fair value as “based on an orderly transaction between market participants at the measurement date.” When evaluating prior transactions for thinly traded digital assets, entities must assess the identity of the transacting parties, the existence of informational asymmetry and whether transactions occurred under distressed, biased or forced conditions.
Historical transaction prices may not represent prices achievable in an orderly market, particularly when market conditions have shifted significantly or new information has become available. CFOs should exercise caution when relying on prior transactions without corroboration or adjustment.
Discount for lack of marketability
For Level 2 and Level 3 digital assets, limited exchange access, thin trading volume, lockup provisions or practical transfer constraints can materially impair liquidity. From a market participant perspective, these limitations reduce the ability to convert the asset into cash within a reasonable period without materially affecting price.
As a result, the indicated fair value of such assets may require a discount for lack of marketability to reflect economic reality. This consideration is especially relevant for minority positions, treasury‑held tokens or assets without a clearly defined liquidity path.
Practical Takeaways for Finance Leaders
*Click to enlarge the image above
Valuing Digital Assets When Markets Fall Short
As digital asset markets continue to evolve, valuation frameworks must evolve alongside them, particularly when crypto assets exist without fully functioning or orderly markets. Weaver’s digital asset valuation team brings deep experience applying ASC 820 in complex digital asset environments and has assisted clients across financial reporting, management planning, listing requirements, tax reporting and transfer‑related matters. Contact us to evaluate your digital asset holdings and develop a valuation approach grounded in market realities.
Authored by Dillon Aston and Liza Bowersox
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