Introduction
The term “real-world assets” (RWA) refers to digital assets that represent an ownership right in another asset or an asset pool.
Examples of RWA:
Stablecoins
Tokenized real estate
Tokenized corporate stock
Tokenized treasury notes
Background
Real-world assets fall outside of the definition of the crypto assets in FASB ASC 350-60-15-1 because RWA tokens by its definition provide holders with a claim on a real-world asset these tokens represent. So how should companies holding RWA tokens account for such tokens? To answer, we analyzed common business models of issuer entities, redemption rights provided by tokens, and key risks associated with RWA tokens. The brief summary of this analysis is provided below.
Business model
The business model consists of 4 steps (Steps 1and 2 might take place in any order):
Step 1. Management sells fractionalized ownership/redemption rights.
Step 2. Management acquires the underlying assets.
Step 3. Management generates income via:
Earning interest on cash deposited in a bank.
Lending financial assets to short sellers.
Staking assets.
Renting out a property.
Step 4. Management retains 100% of the income from operating the underlying asset.
Redemption rights
Typically, an RWA does not represent an ownership interest in the actual asset. A special-purpose legal entity owns the underlying asset and issues tokens. This entity grants holders of RWA tokens the right to redeem their tokens for cash or the entity’s property.
Redemption rights might be unlimited or limited to a special group of intermediaries who guarantee the redemption-like rights to retail token holders.
Redemption rights for underlying non-financial assets might be exercisable in cash (assuming the entity holds cash generated from operating assets) or in kind. In-kind redemptions often require the holder to meet a threshold of ownership that may reach 100% for indivisibles assets.
Business risks
For RWA token holders, the two main risks associated with this business model are:
Loss or damage of the underlying asset in the course of operation.
The occurrence of an event triggers the creation of a material legal liability with a higher priority.
Accounting by the token holder
The acquirer of an RWA token should account for it as an acquisition of a debt or debt-like instrument.
Tokens redeemable for fiat, whether conditionally or unconditionally, should be treated as a financial asset. This is consistent with the definition of financial assets provided in the FASB master glossary: “A financial asset is cash, evidence of an ownership interest in an entity, or a contract that allows one entity to receive cash or another financial instrument from another entity.”
Tokens that can only be redeemed for property should be treated as non-financial receivables. Further, when a non-financial asset can be readily converted to cash, reporting entities might be able to choose an accounting policy to either:
Remeasure the RWA token instrument at its fair value (by analogy); or
Determine whether the instrument contains an embedded derivative that requires bifurcation and separate recognition.
Conclusion
The nature of the RWA token drives its classification and subsequent measurement. However, the process of determining the nature of RWA tokens and associated rights and obligations is often a complex judgmental error-prone process. Reporting entities need to carefully evaluate specific contractual terms of each individual arrangement and account for all relevant facts and circumstances.