Effect of digital currency in financial sector & how we account it in financial statements

Introduction

The simple meaning of term is digital currency is, a form of currency that exists only in digital or electronic form and that can operate independently of a central bank. Firstly in 1983, research paper by David Chaum introduced the idea of digital cash, subsequently e-gold become the first widely used Internet money. In 2009, the most popular and profitable digital currency bitcoin was launched by an anonymous developer or group of developers using the name Satoshi Nakamoto. Bitcoin marked the start of decentralized blockchain-based digital currencies with no central server, and no tangible assets held in reserve. El Salvador & Central African Republic are the countries which announced Crypto as a Legal Tender.

Effect of Digital Currency in Financial Market

It is said that, money shapes economies, economies shape nations, nations shape history. It follows that the future of money is profoundly important. Digital currencies are rapidly changing the nature of money itself. It issued by central banks will have some major implications for the financial sector. It could be threatening the stability of the financial system.

For businesses, digital currency is going to be a welcome change. The competition in the digital payment space is going to yield a range of benefits resulting from lower costs and make it much easier to execute payments, both within and across borders.

Accounting of digital currency

There are many issues that accountants may encounter while accounting of digital currency because till now no accounting standard/ Indian accounting standard or any specific guidelines exists for accounting of digital currency. As no accounting standard currently exists to explain how digital currency should be accounted for, accountants have no alternative but to refer to existing accounting standards.

Accounting standards that might be used for accounting of digital currency

At first, it might appear that digital currency should be accounted for as cash because it is a form of digital money. However, it cannot be considered equivalent to cash because they cannot readily be exchanged for any good or service. Although there is an increasing number of entities that are accepting digital currencies as payment, digital currencies are not yet widely accepted as a medium of exchange and do not represent legal tender. The entities may accept payment in digital currencies, but there is no legal requirement to do so.

Further, it might appear that digital currency should be accounted for as a financial asset at fair value through profit or loss in accordance with Ind AS 109 Financial Instruments. But digital currency does not meet the definition of a financial instrument because it does not represent cash, an equity interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Also, digital currency is neither a debt security, nor an equity security despite from fact that a digital asset could be in the form of an equity security, because it does not represent an ownership interest in an entity. So, we can say that it appears digital currency should not be accounted for as a financial asset.

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