Metamorphosis of Cash to Crypto

IAS 7 Cash Flows defines cash as “cash on hand and demand deposits”. The standards to not make a clear distinction between what is ‘cash’ and what is ‘currency’; both IAS 21 The Effects of Changes in Foreign Exchange Rates and IAS 32 Financial Instruments: Presentation, make a connection between ‘cash’ and ‘currency’. On this basis we seek to the legal interpretation of the country’s statute to determine what would constitute cash.

IAS 7 defines cash equivalents as “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value”. To understand what cash on hand and demand deposits are, we seek to regulation of the country the financial statements are presented in to understand if the currency would be classified as cash.

In South Africa (SA), fiat currencies including notes and coins are not backed by a physical commodity. These are currencies issued by a State Government that are considered legal tender, which means that a creditor has to accept it as settlement of an obligation. In SA, the South African Reserve Bank (SARB) is the central bank and in accordance with the South African Reserve Bank Act 90 of 1989, it has the sole right to issue currency in the country. 

In accordance with the SARB Act, currently, cash payments are the only form of payments that is declared a legal tender in SA. Although there are different methods of payment, such as cheques, credit cards, debit orders, electronic fund transfers, bills of exchange, travel and entertainment cards and retail cards; these transactions are still backed by fiat currency and falls within the regulatory framework of payment methods in SA.

The legal classification of cryptocurrencies as cash are yet to be determined in SA. Due to its nature the current regulatory framework for payment methods do not apply. The SARB has not yet adopted crypto currencies as a formal tender in SA, although it has been planning regulatory measures on it since 2020. While SA is performing a feasibility study over its own form of central bank digital currency, Nigeria have adopted a central bank digital currency eNaira and the definition of cash would need to be separately evaluated for that currency.

Is cryptocurrencies cash equivalents? Crypto currencies change in value with little to no notice. Because of the high volatility in the value of cryptocurrencies they are not classified as cash equivalents, which must be subject to an insignificant risk of change in value.

Another consideration would be stable coins, which are cryptocurrencies that are pledged to a refence asset, i.e., fiat currency commodity, or other cryptocurrencies. Examples of coins of each of these are, but not limited to:

Fiat-backed currencies are more stable as they are backed by the physical currency, however, this does not make them cash. Cash can be converted to stable coins and stable coins to cash, but the core function of cash cannot be performed by stable coin. They are not regulated by a central bank or government, and nor are they recognised as legal tender by most countries, indicating that they are not cash as defined. The assets held as collateral to the value would determine its stability, if it is pledged one to one, the coin value would be more stable, but this is dependent on whether the virtual asset service provider has a reserve to back the cryptocurrencies. Further to this, one would need to consider the legal nature and the general terms of the stable coin to determine if they would constitute cash equivalents.

The crypto assets that are commodity-backed and crypto-backed will not constitute cash equivalents because their value is still subject to significant value changes and they are not readily convertible to cash. If the tokens provide the holder with rights to an underlying asset, careful consideration should be given to whether the tokens should be accounted for in a similar manner as the underlying asset, or simply a liability.

The transition from cash to cryptocurrency has led to many questions regarding the classification as cash, however, due to the crypto’s nature and the current regulatory framework, coupled with the value instability it would not constitute cash and cash equivalents. Stable coins that are backed by fiat currency, could constitute cash equivalents depending on legal nature and general terms of the coins.

If you would like to learn more about the stable coins, please read the following article:

A three-pronged solution to poor confidence in stable coins

06 December 2022