DATs Want to Use LSTs to Juice Yields. The Problem? They Can Hurt Earnings

For years Michael Saylor railed against FASB and the other accounting authorities that he should be allowed to value his billions of dollars’ worth of bitcoin at their market price. But up until 2024, he was prohibited. Due to an arcane accounting rule, he was required to mark his holdings down during bad years and quarters, but he could not revalue them when times were good.

Eventually, he was able to change the rules, but now liquid staking tokens are facing a similar type of discrimination. And it is becoming a big issue because it is forcing digital asset treasury companies that use them to present financial reports that may not accurately reflect their balance sheet.

All of this is likely to cause a ton of investor confusion just as these companies go mainstream and fight for ways to juice out gains in an increasingly competitive market.

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DATs Want to Use LSTs to Juice Yields. The Problem? They Can Hurt Earnings

Liquid staking tokens (LSTs) let crypto treasury firms amplify returns on their holdings. But supporters say that old FASB guidance is unfairly penalizing them by blocking mark-to-market accounting.

Liquid staking token (LST) providers, which already hold over $104.5 billion in assets, should be a perfect tool for digital asset treasury (DAT) companies looking for ways to generate maximum income from their balance sheets.

However, an outdated accounting rule means those same LSTs are causing headaches. 

LSTs can be particularly appealing to DATs because they allow firms to generate excess yields on top of staking rewards, which are seen as a basic hurdle rate in crypto. 

“One key difference and intended benefit of liquid staking is that it provides for liquidity by allowing the company to earn staking rewards while still maintaining the ability, provided through the receipt token, to enter into other transactions,” said a representative for Sharplink, an Ethereum DAT, in a statement to Unchained.

But according to rules set out by the Financial Accounting Standards Board (FASB), a private organization that sets Generally Accepted Accounting Principles (GAAP) for U.S. companies, these firms cannot mark the tokens to market, meaning that they can’t account for price increases on their balance sheets alongside drops. This limitation is particularly problematic during bullish periods like today, when prominent proof-of-stake tokens like Ethereum and Solana are up 186% and 104%, respectively, over the past six months.

Companies like DAT firms that respectively own $31.4 billion worth of ether and $2.98 billion of solana would not be allowed to update their financial statements to reflect this appreciation if they use LSTs. Adding insult to injury, they must use the lowest prices the tokens traded at during that quarter.

This accounting treatment could cause a lot of investor confusion within the DAT industry because income statements could look wildly different between a firm that uses LSTs and one that doesn’t, even if the actual market values of their token piles are identical.

“DATs want to ensure that the financial reporting that they're all doing is easily comparable so that we're not comparing apples to oranges,” said Alison Mangiero, Head of Staking Policy and Industry Affairs at the Crypto Council for Innovation, a lobbying group. “They're very concerned with making sure that there is one standard for everyone.”

The industry is now trying to change this rule, but it will likely take time and it is far from a sure thing, even when the government comes back to work.

What Is an ‘Indefinite Lived Intangible Asset’?

This mouthful of a phrase is an anvil holding down liquid staking tokens. First defined in a FASB bulletin from June 2001, “indefinite lived intangible asset” addresses how intangible assets, meaning those that lack a physical form, and are acquired individually or with a group of other assets, should be accounted for in financial statements upon their acquisition.

It should not surprise crypto enthusiasts that a rule created seven years before the publication of the Bitcoin white paper is an imperfect fit for crypto. “There was a period where you had companies holding bitcoin or ether that had periodically tested it to see whether or not it's impaired,” said Evan Thomas, general counsel at the staking provider Alluvial. “If it is, then you rate it down. But you don't mark it back up if the market value then goes back up unless you actually dispose of the asset.”

But the most interesting part about Thomas’s comments was that this type of treatment, as he put it, “is intended for things like trademarks which have indefinite life” — not digital assets that do billions of dollars in daily trading volume. 

This treatment changed for digital assets like bitcoin and ether when the FASB released ASU-2023-08 and ASC-350-60 in 2023, which allowed those tokens to be valued, for accounting purposes, at current market price. But LSTs, which are essentially stablecoins tied to the value of a unit of ether or solana as opposed to a dollar or euro, were left out.

Better Safe Than Sorry

Because of this uncertainty, DATs holding LSTs have little choice but to take the conservative approach, even if it is wrong in their minds (or at least hearts). The risks are too great. “We need to be able to get our financial statements done in accordance with US GAAP and get it filed on time,” said Charles Allen, CEO of the ether treasury company BTCS, which does not use LSTs. “Because if you can't report, if you're late on a 10-Q or an 8-K, you lose your S-3 eligibility, which has allowed you to have access to an ATM or do a registered direct [offering of shares]. And you lose it for a year.”

This penalty essentially prohibits the company from fundraising, which would be a death knell for any DAT, whose participants are racing against each other to raise money in an ever crowded field. 

How the Industry Is Fighting Back

With the understanding that LSTs were likely just an afterthought when ASU-2023-08 was released, a consortium of companies is now trying to get guidance or get the rule updated. On Aug. 25, the CCI sent a letter to FASB and the Security and Exchange Commission’s (SEC) Office of the Chief Accountant to seek clarification on how LSTs should be treated under ASU 350-60. Specifically, it makes the case that LSTs are akin to so-called “warehouse receipts” for securities, which Mangiero likened to coat check receipts, that offer the same risk profiles as the underlying asset. 

One important passage from the letter reads:

LSTs are transferable receipts that represent ownership of staked crypto assets—similar to warehouse receipts in traditional markets. The SEC has already recognized this view in recent guidance, but without clear accounting treatment, companies apply inconsistent approaches, leading to divergent financial reporting. This lack of uniformity undermines comparability and deprives investors of consistent, decision-useful information necessary to assess performance and risk.

When Unchained reached out to FASB for comment, a spokesperson replied, “As with all agenda requests, the FASB will discuss the letter at a future meeting.” The SEC was unable to reply to Unchained’s request for comment due to the government shutdown.

Varying Levels of Risk

While it may seem easy (and logical) for FASB to update its guidance, complications could arise when you consider that the reliability and security of various LST providers can widely diverge, meaning that some LSTs could be much riskier than stablecoins. “If you're working with a more opaque and less reputable staking pool, then there could be an element of counterparty risk where you're not really sure if you're going to get the exact true value back that you expect or the exact amount of tokens back,” said Tomek Kowalski, global controller at CoinTracker. “There could be some risk of loss there with the counterparty. So it's a bit of a judgment call, unfortunately.”

If you accept this premise, he believes the argument could be made that LSTs are more akin to a contractual relationship. “You could think of [LSTs] as potentially a derivative of ETH,” he said. “A good example is Coinbase ETH or cbETH, because you have a contractual right with Coinbase to redeem that staked ETH at a future point in time. So it's no longer like the asset itself, it's more of a derivative of the asset.” 

Mangiero admits that levels of reliability and risk can vary between LST providers, which is why a prior organization of hers, the Proof of Stake Alliance, came out with a set of best practices for staking in 2023, which included a couple of mentions of liquid staking related to obtaining user consent and disclosing all relevant information to a client. She noted in an interview that perhaps the principles could be updated again, but was also steadfast that the proposed rule changes outlined in their letter to the FASB and SEC should treat all LSTs equally. “I don't think it affects the accounting treatment,” she said. “I do think there should be industry standards more generally, but I don't think there's a difference when it comes to fair value accounting.” 

(Individual LSTs do trade at varying prices, with stETH trading at $4,134, rETH $4,733, and cbETH $4,546 at the time of writing. However, these are more likely to reflect differences in how these tokens incorporate earnings yields rather than the concerns Kowalski flagged.)

Waiting on Impact

As of now, this problem is more of an academic than practical one, as the only DATs currently using LSTs are Sharplink (Ethereum), EthZilla (Ethereum), and DeFi Development Corporation (Solana). And none of those firms use LSTs as a primary treasury management strategy. 

But more are likely coming. Kevin Huang, an advisor to Sharps Technology, a Solana DAT, said in an interview that LSTs could comprise as much as 50% of a company’s treasury in the coming years, which could lead to massive variances between financial statements and the actual value of a firm’s token holdings.

This could become especially true as stock premiums become compressed due to market saturation and firms look for ways to stretch out gains and increase revenues. LSTs can be riskier than native staking, because those tokens can then be deployed in the DeFi industry, where hacks are more common and risk management becomes more important.

But companies looking for an edge may not have a choice.

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