To validate crypto transactions, there are two types of consensus mechanisms, proof of work (e.g., Bitcoin) and proof of stake (e.g., Ethereum). Proof of work can be resource demanding; accordingly, as an alternative, some platforms verify transactions through proof of stake. The proof of stake consensus mechanism provides holders of the crypto assets the ability to validate transactions based on their proportionate holdings in the asset.
Upon execution of a transaction utilizing crypto assets under a proof of work consensus mechanism, reporting entities known as miners often perform a complex computation to create the hash necessary for the public ledger. Miners provide computing power in order to participate in the block validation process. Each block is verified by a miner before its information is stored. When the block is added to the chain and consensus exists regarding the block, it is shared by all network nodes. This gives rise to a unique transaction history. For validating the transaction, the miner may receive a transaction fee from a participant in the transaction and/or a block reward. A block reward is the receipt of newly issued crypto assets issued to the miner for successfully validating the block of transactions.
If the miner receives a transaction fee from a participant in the transaction, the miner should consider whether the transaction is a contract with a customer in the scope of ASC 606. If so, the miner would generally recognize the transaction fee as revenue when it satisfies its performance obligation (i.e., validates a transaction on the distributed ledger).
If the miner receives a block reward under the consensus protocols of the crypto asset, the miner will need to assess whether the receipt of the block reward is a contract with a customer in the scope of ASC 606, which may require judgment.
Under a proof of stake consensus mechanism, holders of the crypto assets can stake their crypto assets to validate transactions on the blockchain. A reporting entity may use its crypto assets, technology, and equipment to validate transactions directly to earn transaction fees and staking rewards. Alternatively, a reporting entity may earn staking rewards by delegating its crypto assets to another entity that validates the transactions.
Reporting entities should follow the guidance in ASC 350, ASC 610-20, and associated interpretations, including views expressed by the SEC staff and published by the AICPA on crypto lending, when evaluating whether to derecognize staked crypto assets. See CA 2.3 and CA 3.4 for additional information.
A reporting entity that stakes its crypto assets to earn staking rewards should consider whether the transaction is a contract with a customer in the scope of ASC 606, which may require judgment. If it is, the reporting entity should evaluate whether it is the principal to the validation activities on the blockchain to determine whether it should recognize the staking rewards as revenue on a gross or net basis.
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