If there’s one asset class that could benefit from more oversight and regulation, it might well be cryptocurrency. Some longtime crypto backers agree with that sentiment.
Following the collapse of FTX last year and controversies concerning other crypto exchanges and trading platforms, U.S. regulators are looking to increase oversight of digital currency. That could actually work in favor of the asset class and exchange traded funds, such as the Invesco Alerian Galaxy Crypto Economy ETF (SATO).
SATO, which follows the Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index, is home to 38 holdings, 37 of which qualify as crypto-correlated or crypto-adjacent stocks. That is to say, some SATO components are intimately correlated to bitcoin prices and other goings on — positive and negative — in the digital currency space while others are more indirect beneficiaries of broader crypto enthusiasm.
Regardless of SATO member firms’ crypto correlations, the bulk of the ETF’s holding could garner long-term benefits from more regulatory efforts, including the U.S. Financial Accounting Standards Board (FASB) pitching new guidelines for more effectively placing fair values on held cryptoassets.
“The proposal would mainly rectify the accounting for cryptoassets at fair value, but that fair value is not as useful on its own, especially for nonfinancial companies that primarily use these assets as an investment. We support the required disclosure that will accompany the reporting of fair value,” noted Moody’s Investors Service. “A specific shortcoming under current guidance is that it is not possible to determine a holding gain from investments in crypto assets. We believe the required disclosures will enhance the fair value accounting by providing the separation of type, fair value and number of units, allowing investors to understand how investment cryptoassets are performing or have performed during a holding period.”
Notably, the FASB proposal would require some crypto-related firms, potentially including some SATO holdings, to disclose the digital assets they’re holding. That could be applicable to roughly a third of SATO’s roster.
“The proposal also clarified that any companies that receive cryptoassets as payment in the ordinary course of business should classify the payment as operating cash flow if they have immediately converted that payment to cash. There is no requirement proposed, but we believe investors would value a required disclosure of the total amount of non-cash consideration received during a reporting period,” added Moody’s.
Bottom line: If the FASB proposal comes to life, it could be near-term burdensome but long-term positive for SATO and a substantial portion of the ETF’s portfolio.
VettaFi LLC (“VettaFi”) is the index provider for SATO, for which it receives an index licensing fee. However, SATO is not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing or trading of SATO.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.