Restrictions on the sale and transfer of tokens are a frequent and critical consideration when evaluating the fair value of digital assets. This issue affects financial reporting under US GAAP, particularly for entities holding or issuing crypto assets, token-based compensation, or tokens receivable and payable.
This article explains how contractual and inherent to an instrument restrictions affect fair value measurement, disclosure requirements, and the assessment of whether crypto assets are readily convertible to cash.
Relevant Considrerations
Fair Value
Before ASU 2022-03, diversity existed in practice regarding whether entities reporting under U.S. GAAP should apply a discount to the price of equity securities subject to a contractual sale restriction. Some preparers adjusted the fair value of securities subject to restrictions to reflect such discounts. In contrast, others considered such a discount inappropriate.
ASU 2022-03 unified practice by clarifying that a contractual restriction on the sale of an equity security is specific to the reporting entity holding the security rather than a characteristic of the security itself. Therefore, the contractual restriction is not considered in measuring the fair value of the equity security. Restrictions that are characteristics of the asset and would be considered by market participants when pricing the asset are reflected in fair value. [FASB ASC 820-10-35-36B, 820-10-55-51 through 55-52A]
Although ASU 2022-03 specifically addresses equity securities, the broader ASC 820 principle regarding restrictions remains relevant to crypto assets. A restriction that is a characteristic of the asset and would transfer with the asset is considered in measuring fair value, while a restriction that applies only to the reporting entity holding the asset generally is not.
In September 2026, FASB issued ASU 2026-03, which creates a narrow exception for investment companies within the scope of ASC 946. Upon adoption, those investment companies are required to reflect contractual sale restrictions when measuring the fair value of equity securities subject to those restrictions. This exception applies to equity securities and does not extend to crypto assets. [ASU 2026-03]
Even though the disclosure requirements introduced by ASU 2022-03 apply to equity securities subject to contractual sale restrictions, similar disclosures are separately required for crypto assets within the scope of ASC 350-60 that are subject to contractual sale restrictions. These disclosures include:
The fair value of the crypto assets subject to contractual sale restrictions;
The nature and remaining duration of the restrictions; and
The circumstances that could cause the restrictions to lapse.
[FASB ASC 350-60-50-6]
For material balances of other digital assets outside the scope of ASC 350-60, entities should evaluate the disclosure requirements applicable to those assets rather than assume that ASC 350-60-50-6 applies.
Readily Convertible to Cash
Contractual sale restrictions are also relevant when evaluating whether an asset is readily convertible to cash.
ASC 815 contains specific guidance for shares of publicly traded stock that will be received upon exercise of a stock purchase warrant. Those shares are not considered readily convertible to cash when both of the following conditions are present:
The warrant was issued by an entity for its own stock or the stock of a consolidated subsidiary; and
The shares received upon exercise cannot be sold or transferred for at least 32 days, other than a restriction arising from a pledge of the shares as collateral.
[FASB ASC 815-10-15-131]
However, ASC 815-10-15-132 explicitly prohibits applying this guidance by analogy to other contracts. Thus, the specific 32-day restriction in ASC 815-10-15-131 should not be applied by analogy in determining whether a crypto asset is readily convertible to cash. A crypto asset must instead be evaluated under the general criteria for determining whether an asset is readily convertible to cash.
Accordingly, a contractual sale restriction does not, by itself, prevent a crypto asset from being considered readily convertible to cash based on the specific guidance in ASC 815-10-15-131.
Similarly, the identification of an embedded derivative referencing a crypto asset should not be affected merely by applying the specific 32-day restriction guidance by analogy. However, the applicable requirements of ASC 815 must still be evaluated independently. Initial and subsequent fair value measurement should also consider restrictions that are characteristics of the underlying asset.
Thus, for tokens receivable or payable, a contractual transfer restriction should not affect the identification and recognition of an embedded derivative solely by analogy to ASC 815-10-15-131. However, the initial and subsequent fair value measurement might require an adjustment for restrictions that are characteristics of the underlying tokens.
Practical Implications for Token Fair Value Measurement
When measuring the fair value of token compensation liabilities or tokens receivable, entities should consider restrictions on sale or transfer and reflect those restrictions in fair value when they are characteristics of the asset. This may occur when:
The lockup feature is embedded directly in the token’s smart contract or code base and applies to the token regardless of who holds it; or
The token or the applicable right cannot be transferred because of a characteristic that would apply to a market participant acquiring that asset.
Whether a restriction is a characteristic of the asset ultimately depends on whether the restriction would transfer with the asset and would be considered by market participants when pricing it. Generally, these restrictions are considered inherent to the asset based on its unit of account.
In contrast, when otherwise transferable tokens are locked in a separate smart contract as a result of an arrangement entered into by the holder, the restriction generally is specific to that holder rather than inherent to the underlying token. Hence, entities need NOT account for such restrictions when measuring the fair value of tokens receivable or payable.
Further, when measuring the fair value of token compensation liabilities, entities should not adjust the fair value of the underlying token merely for vesting or lockup provisions that are specific to an individual award, unless those provisions are characteristics of the asset being measured.
Conclusion
A clear distinction must be made between restrictions that are inherent to the digital assets themselves (that is, technological restrictions) and contractual restrictions that apply only to an individual entity (that is, legal restrictions). Only restrictions inherent to the asset’s unit of account affect its fair value. Contractual restrictions do not affect fair value, nor do they prevent crypto assets from being considered readily convertible to cash.
Update note (September 30, 2026). For investment companies within the scope of ASC 946, ASU 2026-03 creates a separate exception for equity securities subject to contractual sale restrictions but not for crypto assets.