SEC rejects Microstrategy BTC accounting strategy

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Michael Saylor’s MicroStrategy (NASDAQ: MSTR) made world headlines in 2020 when it announced it was converting its entire corporate treasury into BTC.

The firm initially purchased over $250 million worth of BTC and has since raised billions in debt to purchase more BTC coins. MicroStrategy’s CEO, Michael Saylor, has bought into the “Bitcoin as digital gold narrative wholesale and has been busy telling anyone who will listen to go all-in on it since.

However, the NASDAQ-listed company is now facing problems on two fronts: BTC has plunged in recent months with no signs of recovery in sight, and the SEC has now officially rejected its BTC accounting strategy.

What’s the problem with MicroStrategy’s accounting methods?

The U.S. Securities and Exchange Commission (SEC), headed by Chairman Gary Gensler, objects to MicroStrategy’s adjustment for BTC impairment charges using non-GAAP measures.

GAAP stands for Generally Accepted Accounting Principles for those not in the accounting game. As things stand, the GAAP offers no rules on reporting the value of digital assets such as digital currencies or NFTs.

To cut a long story short, this means that businesses that don’t qualify as investment firms should record digital assets at historical cost and only adjust it if the value declines. Consequently, once the value of the holdings gets written down (impaired), they can’t revise the value up again if and when the price recovers.

MicroStrategy told the SEC that it had used this strategy to give its investors a broader view of its finances. The firm feels that only showing the temporary declines in value would not paint the full picture for investors.

The SEC rejected this adjustment and asked MicroStrategy to remove it from future filings. MicroStrategy indicated that it would comply.

However, after Microstrategy and hundreds of other firms wrote to the Financial Accounting Standards Board in 2021 requesting it to develop better rules for dealing with digital currencies, the board agreed to start working on the issue. Perhaps, in time, better accounting practices will be developed. Until then, the SEC is standing firm.

Saylor yet again in the SEC’s bad books

The SEC’s rejection of MicroStrategy’s accounting methods is the equivalent of it saying, “nice try, fella, but we see what you’re trying to do!”

For those who don’t know his history, this isn’t the first time Saylor has had an encounter with the regulator. At the height of the dot com bubble back in 2000, the SEC officially opened an investigation into Saylor and accused him of fraud. The case ended with a settlement, and Saylor neither admitted nor denied the allegations. He wound up paying $8 million+ to investors and a $350,000 penalty to the regulator.

What did the SEC officially find in the investigation? Largely, that MicroStrategy was actually losing money rather than making profits and that the firm was surviving thanks to new investors’ capital thanks to the hype and mania surrounding the dot com bubble. Sound familiar?

BTC works the exact same way. Those who understand Bitcoin know that BTC is doomed to economic failure and is inherently useless. The only way holders of the coin make any profits is by cashing out when other investors buy at a higher price. This is similar to how pyramid schemes work, but BTC escapes classification as such because an item (albeit a digital one) classified as an actual commodity does change hands.

It remains to be seen how MicroStrategy will navigate the SEC’s rejection of its accounting strategy and whether Saylor himself will face any sanctions when this bubble inevitably pops. In the meantime, the company’s stock is getting hammered, having fallen more than 17.8% on January 21 when the announcement was made.

Watch: SEC Commissioner Hester Peirce on Bitcoin Association’s Blockchain Policy Matters