- Whether to derecognize staked crypto intangible assets (staked tokens)
In general, staked tokens are not derecognized by the staking entity. This is because, regardless of whether the staked tokens continue to reside in the staking entity’s digital wallet, no other entity obtains the right or ability to direct their use (e.g. the right or ability to sell, lend or otherwise transfer those crypto intangible assets) or to obtain their remaining economic benefits (e.g. the right to sell them for their current market value or realize any appreciation in such value). Therefore, the derecognition requirements in section 350-10-40 are not met and the conditions outlined by the SEC staff for loaned crypto intangible asset derecognition do not exist. Therefore, the staked tokens remain recognized assets of the staking entity and the staking entity continues to account for them in the same manner as its other held crypto intangible assets.
- Determining the principal to validation activities
When no delegators are involved:
When a validator’s stake – i.e. that which earned it the right to participate in validation – does not include delegated tokens, the validator is the only party involved in the validation activities that give rise to the staking rewards. Therefore, it must be the principal to those validation activities. The validator records the entire amount of the staking rewards to which it is entitled for the validation activities as its own revenue (see Staking rewards).
When delegators are involved
When a validator’s stake includes the staked tokens of delegators, the question arises about which entity, the validator or the delegator, is the principal to the ‘specified service’ of completing the required transaction validation activities (e.g. block proposals, attestations or synching). Is the validator providing this specified service or, instead, is the delegator providing it (i.e. with the validator, in effect, serving as a subcontractor)? The entity’s accounting for the staking rewards will differ based on that determination.
- Transaction fees earned by a validator
We believe transaction fees earned by a validator generally reflect revenue from a contract with a customer (i.e. the transaction initiator) under Topic 606 that should be recognized at the point in time the validator successfully validates the transaction to the blockchain.
- Staking rewards
As similarly concluded for block rewards earned on a PoW blockchain like Bitcoin, whether staking rewards revenue earned is revenue from a contract with a customer under Topic 606 or ‘other revenue’ (which is required to be presented or disclosed separately from Topic 606 customer revenue) is based on the facts and circumstances, including the blockchain’s protocols, and frequently involves judgment. Often, we have observed entities conclude that a decentralized blockchain network cannot, as a non-entity, be a customer and, therefore, the staking rewards are most appropriately characterized as ‘other revenue’. However, even if staking rewards revenue is classified as other revenue, we believe analogizing to the revenue recognition guidance in Topic 606 will typically be appropriate.