When analyzing customer arrangements between blockchain end users and miners, the AICPA Digital Assets guide concluded that there were specific arrangements due to end users' approval of the transaction before they initiated the blockchain transaction. We wanted to explore this statement and assess whether there are actual legally enforceable arrangements between the parties and the implications of this answer for the accounting treatment of block and inflation awards as per the AICPA guide.
Miners typically do not indicate acceptance of terms in any other way other than because they have included transactions in the mined block. There is no direct contract in place between miner and end-user, but rather two arrangements independent from each other (because termination by any of the parties does not have an effect on the existence of another agreement) - (1) contracts of blockchain protocol with end users who signed the transaction sent to the blockchain (2) contracts of blockchain protocol with miners who are executing the blockchain binaries in exchange for rewards distributed by the protocol to a selected miner
Here I will argue that the rights and obligations under such arrangements are enforceable by the protocol.
The core substance of the enforceability requirement is to ensure that there is a solid basis for entities to derive the value they expect to be entitled to in exchange for goods transferred and services provided to customers.
AICPA Digital Assets Guide p.26-27
The AICPA Digital Assets Guide concludes that transaction fees earned by crypto asset miners are revenue from contracts with customers under ASC 606. Under the Guide's analysis, the requester is the customer and the transaction fee represents consideration for successfully processing the requester's transaction. [AICPA Digital Assets Guide, Question 27]
Requestors do not pay anything to the successful miner, and they do not pay miners. The payments are made to the protocol, which then distributes these payments based.
The AICPA Guide treats the requester as a customer and concludes that a contract exists when the miner successfully validates and adds the requester's transaction to the distributed ledger. [AICPA Digital Assets Guide, Question 27]
The requester usually couldn't obtain the refund for the submitted transaction, but the transaction may get stuck in the memory pool and never be processed.
No legal contract exists between the miner who mined the transaction and the requester. No single miner is responsible for including the requestor's transaction in the blockchain. Instead, regardless of whether they were awarded transaction fees, every miner will eventually have all past transactions. There are no mutual rights and obligations between miners and network participants. Instead, miners and requestors interact with a blockchain protocol - a separately identifiable entity (which can often be managed by DAO or another legal entity).
The AICPA Guide concludes that the ASC 606 contract criteria are satisfied when the transaction is successfully validated and added to the distributed ledger. Its analysis considers the parties’ approval, identifiable rights and payment terms, commercial substance, and collectibility of the transaction fee. The Guide concludes that the miner satisfies its performance obligation when the block is successfully mined. [AICPA Digital Assets Guide, Question 27].
This is a loose analysis covering only the bitcoin protocol and nothing else. AICPA members, please do a more thorough research.
The AICPA Guide treats transaction fees paid in crypto assets as noncash consideration under ASC 606. It also concludes that block rewards generally represent revenue, although an entity must determine whether that revenue arises from a contract with a customer. If ASC 606 does not apply directly, the Guide indicates that its recognition and measurement principles may be considered by analogy, with appropriate presentation or disclosure of revenue that is outside ASC 606. [AICPA Digital Assets Guide, Question 27]
Huh. AICPA suggests using ASC 606 by analogy... The issue with using ASC 606 by analogy is that under ASC 606, in the absence of enforceable rights, the following criteria are required to record revenue:
When an arrangement does not initially meet the contract criteria in ASC 606, consideration received may nevertheless become recognizable when the applicable conditions for completed or terminated arrangements and nonrefundable consideration are satisfied. [FASB ASC 606]
It means that without an enforceable arrangement, under ASC 606 miners cannot recognize revenue until they cease the mining business. Obviously, this accounting would not provide any helpful information to users of financial statements. So, we typically see crypto miners record revenue on receipt of network rewards. However, this accounting treatment requires the company to assume that the blockchain protocol is by itself an enforcement mechanism.