Web3 startups are growing in number every day, and with this comes increased investment and regulation. Most businesses need investors to thrive, and investors need clean and understandable financial statements to make informed decisions. It’s that simple.
Just ask the founders of FTX (The third-largest crypto exchange), whose lack of proper financial controls led to one of the biggest corporate collapses in history.
Today’s investors and regulators demand the same level of financial rigour from crypto companies that they expect from traditional enterprises, and the companies that don’t adapt are getting left behind in the funding race.
Crypto Financials Under Scrutiny
With the increasing flow of institutional capital and growing regulatory oversight, Web3 financial reporting compliance has become a pressing need. Many investors struggle to fully understand the assets they invest in, primarily because traditional metrics are often used rather than crypto-specific factors that influence these digital assets.
Meanwhile, the SEC has intensified actions against firms misclassifying crypto assets or failing to report appropriately. This indicates that the industry is moving toward traditional standards, whether it’s ready or not.
Key Considerations When Creating a Crypto Chart of Accounts
Creating comprehensive crypto financial statements requires an understanding of both the traditional accounting principles and the unique characteristics of digital assets. Let’s break down each component:
Income Statement:
In crypto-native businesses, an income statement goes beyond fiat-based revenues and expenses. It must account for both on-chain and off-chain financial activity, often across multiple tokens and chains. Some key line items of an income statement include:
- Revenue in crypto: Protocol fees (e.g., swap fees, bridge fees), NFT sales, token issuance proceeds, or income from SaaS-like Web3 products (e.g., subscriptions in USDC).
- Staking/yield income: Interest or rewards earned by staking treasury assets or participating in DeFi protocols.
- Realized token sales: When tokens (native or third-party) are sold for fiat or other crypto, the gain/loss is recorded.
- Airdrops received: If considered operational, airdropped tokens may be recorded as other income (subject to local GAAP/IFRS guidelines).
- Operating expenses: Includes gas fees, salaries paid in crypto, contributor grants, node maintenance, smart contract audits, etc.
Balance Sheet:
The balance sheet of a Web3 company differs from a traditional firm because it must reflect:
- Crypto asset holdings: ETH, BTC, stablecoins (USDT/USDC), NFTs, protocol tokens (e.g., UNI, AAVE), wrapped assets, and LP tokens. Each must be categorized and valued appropriately.
- Treasury segmentation: Public DAOs may segment between liquid assets, locked reserves, team allocations, and vesting contracts.
- Custodial vs non-custodial assets: Clarify whether assets are held on CEXs, custodial wallets, or smart contract-based multisigs.
- Tokenized liabilities: DeFi loans, yield farming obligations, or promised token distributions (e.g., grant programs).
- Unvested token commitments: ESOPs or deferred team compensation in tokens, which may be liabilities until vested.
Cash Flow Statements:
Cash flow for crypto financials doesn’t always involve fiat. A modern cash flow statement should trace crypto-to-crypto, crypto-to-fiat, and even inter-wallet flows.
- Operating activities: Include income from protocol usage, sales of NFTs, gas payments, and salaries paid in ETH or stablecoins.
- Investing activities: Include buying NFTs or tokens for long-term holding and deploying treasury funds into DeFi protocols.
- Financing activities: Include token sales, investor token unlocks, DAO fundraising, and treasury buybacks.
Since crypto isn’t legal tender in many countries, regulators expect crypto cash flow to be converted and reconciled in fiat equivalents.
Token/Asset Holdings Disclosure
This section is often the most scrutinized by both investors and regulators, especially in multi-asset, multi-wallet operations. It should include:
- List of assets by type: Native tokens (ETH, SOL), governance tokens, LP tokens, staked assets, NFTs, and off-chain equivalents (tokenized treasuries, RWAs).
- Holding addresses: Clearly mapped wallet addresses, including cold storage, treasury wallets, and custodial accounts.
- Valuation method: Define how each asset is priced, centralized exchange rates, oracle feeds, or a 30-day moving average.
- Vesting and lockups: Breakdown of locked vs liquid token holdings.
- Liquidity risk disclosures: If holding tokens with low liquidity or thin markets.
How to Consolidate Multi-Entity and Multi-Chain Operations in Crypto Finance
Unlike traditional businesses, many crypto-native businesses operate through multiple legal entities and across several blockchain networks. This decentralized structure has significant challenges when preparing consolidated financial statements that meet investor expectations and regulatory standards.
Consolidation for these businesses demands a tailored approach that addresses the on-chain activity, multi-entity governance, and real-time asset pricing all under a single system.
Establishing Entity-Level Books and Records
The foundation of any consolidated financial report is maintaining accurate and complete financial records at the entity level.
Each of the entities must maintain its own general ledger, prepare individual financial statements, and follow the accounting standards applicable to its jurisdiction (e.g., IFRS, US GAAP, or Ind AS). The complexity arises when assets are held in shared wallets or when multiple entities interact financially across the same chain.
Accounting for Inter-Entity Crypto Transfers
In traditional finance, intercompany transfers are reconciled through banking systems and centralized ERP entries. In crypto, these transfers often occur via blockchain wallets that may not be linked to a single legal entity.
Moreover, token transfers between entities can carry different accounting treatments, ranging from grants and service revenue to equity contributions or intercompany loans. Clear documentation, standardized valuation methods, and the use of identifiable wallet tags are crucial for ensuring auditability and compliance.
Reconciling Multi-Chain Crypto Holdings
Businesses dealing with crypto often hold assets across multiple chains, including Ethereum, Solana, Polygon, BNB Chain, and emerging Layer-2 networks like Arbitrum or Base. These assets may include governance tokens, stablecoins, staking derivatives, or wrapped assets, each with different levels of liquidity, custody, and valuation risk. From a financial reporting perspective, it is not enough to know how many tokens are held; firms must also:
- Determine the fair value of each asset as of the reporting date
- Identify the protocol or custodial risk associated with the chain or token
- Track movements between chains, including bridge usage and token wrapping/unwrapping events
A USDT token on Ethereum may have the same nominal value as a USDT token on Solana, but they are technically different assets with distinct smart contracts, custody risks, and sometimes differing price feeds. For consolidated reporting, all these assets must be:
- Valued using a consistent and verifiable price source
- Converted to a unified base currency using appropriate FX and pricing methodologies
- Grouped and classified according to their nature (liquid, restricted, staked, collateralized, etc.)
Currency and Foreign Exchange Accounting
Many crypto firms operate across jurisdictions, which means their financial records may be maintained in different base currencies. For example:
- A US-based DevCo may report in USD
- An India-based subsidiary may report in INR
- A Singapore-based Foundation may report in SGD
- The DAO treasury may operate entirely in crypto with no fiat base
To consolidate group-wide financials, organizations must translate all entity-level statements into a single presentation currency. This translation involves:
- Determining the appropriate exchange rates (spot rate, average rate, or closing rate) per applicable accounting standard
- Recording foreign currency translation adjustments (FCTA) or cumulative translation differences (CTD)
- Disclosing unrealized gains and losses on crypto asset holdings due to FX volatility
In the context of crypto, additional care must be taken when applying FX rates, especially when assets are priced in tokens but need to be translated into fiat for reporting. The price of BTC or ETH in INR, for instance, may differ significantly from its USD equivalent, depending on local liquidity and exchange sources.
Common Mistakes Web3 Teams Make in Financial Reporting
1. Failing to Apply Mark-to-Market Revaluation
Crypto assets are inherently volatile and often experience significant price movements within short timeframes. Yet many teams fail to revalue their holdings periodically, sometimes still reporting token values at acquisition cost months after the fact.
This violates IFRS and GAAP fair value accounting principles, which require assets classified as “held for sale” or “trading” to be reported at their fair market value as of the reporting date. Neglecting to mark-to-market not only misrepresents financial health but also misleads investors about asset liquidity and risk exposure.
2. Missing FX Conversion for Stablecoins
Stablecoins like USDC, USDT, or DAI are often assumed to represent fiat values exactly. However, when financial statements are prepared in a different functional currency, failure to apply the correct FX rate introduces accounting errors. This is especially relevant when stablecoins are held across multiple wallets, chains, or platforms and converted at different times. Without applying FX rates based on the transaction or reporting date, the reported value of stablecoin holdings can become inconsistent or misleading, especially in inflationary environments or jurisdictions with currency controls.
3. Not Performing Impairment Tests on Locked or Illiquid Tokens
Tokens subject to vesting schedules, lockups, or liquidity constraints often need to be tested for impairment, especially if their market value declines below the recorded book value.
Under both IFRS (IAS 36) and GAAP (ASC 350), companies must evaluate whether assets have suffered an impairment loss, particularly when there’s a trigger event such as a token crash, project failure, or delisting.
4. Overlooking DeFi Protocol Liabilities
Participation in DeFi, yield farming, lending, staking, or liquidity provision creates not just income but also liabilities and counterparty exposures. However, many Web3 finance teams fail to capture these in their reporting.
For instance, assets deposited into lending protocols may be encumbered, while yield-bearing vaults may expose treasuries to impermanent loss, liquidation risk, or smart contract vulnerabilities.
Key Liabilities to Capture:
- Open borrow positions (e.g., Aave, Compound)
- Collateralized debt positions (e.g., MakerDAO vaults)
- Rehypothecation risks from LP tokens or yield aggregators
Such exposures must be disclosed under risk management notes and, in some cases, booked as contingent liabilities.
5. Misclassifying Native Tokens on the Balance Sheet
One of the most pervasive errors is the incorrect classification of a company’s or DAO’s own native token in financial statements. Teams often book them as:
- Revenue, if tokens are distributed during protocol activity,
- Equity, when used for team incentives or community grants,
- Or even Assets, if held in the treasury.
Each of these treatments carries vastly different accounting implications.
Under both GAAP and IFRS, internally generated tokens generally cannot be recognized as assets until they are monetized or exchanged. Similarly, revenue recognition standards (e.g., IFRS 15 or ASC 606) require that revenue be tied to the delivery of a good or service, not mere token issuance.
How Does KoinX Books Help Create Satisfactory Crypto Financial Statements?
If you’re running a Web3 business, you already know how messy crypto accounting can get. Data is scattered across wallets, exchanges, protocols, and traditional accounting tools, but it just doesn’t cut it.
KoinX Books makes it easy to clean up that mess and turn your crypto activity into clear, accurate financial statements.
1. Consolidates Data Together
KoinX Books connects to your wallets, exchanges, and DeFi platforms to pull all your transactions into one place. No more manual spreadsheets or copy-pasting.
2. Auto-Generates Financial Reports
From profit & loss to balance sheets, KoinX Books helps you generate the core financial reports investors and auditors expect, based on global standards like IFRS and GAAP.
3. Handles Multi-Entity, Multi-Chain Complexity
Whether you’re managing multiple wallets, chains, or business entities, KoinX Books helps you track everything clearly and even creates consolidated reports.
4. Adds Key Disclosures Automatically
Risk notes, revaluations, token movements, staking income, it includes the key details that regulators and investors look for, so you don’t miss anything important.
5. Audit-Ready, Always
Every number has a traceable history. So when investors or auditors come knocking, you’re ready, with clean records, version logs, and full visibility.
KoinX Books takes the guesswork out of crypto accounting. So you can focus on growth, while staying compliant and building trust with investors.
Conclusion
As the adoption of cryptocurrency is on the rise, so are the expectations. Investors and regulators want financial statements that are accurate, easy to understand, and follow compliance standards like IFRS or GAAP. Amongst all this, cryptocurrency cannot be accounted for with traditional accounting systems.
That’s where KoinX Books helps. It’s built for crypto teams and Web3 Startups to help in managing multiple books and making audit-ready reports simple.
So, whether you’re raising funds or preparing for a regulatory audit. KoinX Books helps you stay ready for investors, regulators, and anything else that comes your way.
Frequently Asked Questions
What Do Investors Typically Expect to See in Crypto Financial Statements?
Investors want clear reporting on revenue, token holdings, expenses, and runway. They also look for transparency in tokenomics, treasury health, and how volatile assets are managed over time.
What Key Disclosures Do Regulators Usually Look for?
Regulators expect disclosures on how crypto assets are valued, revenue recognition from tokens, smart contract risks, staking/yield income, and compliance with standards like IFRS or GAAP.
How Do We Handle Crypto-to-Crypto Transactions in Financial Statements?
Each crypto-to-crypto trade must be treated as two separate taxable events. Accurate fair value at the time of trade must be recorded for proper revenue and cost reporting.
How Do We Consolidate Wallets, Chains, and Entities for Financial Reporting?
You’ll need to map wallets to business functions and consolidate on-chain data across chains. For multiple legal entities, use intercompany accounting and eliminations just like traditional group accounting.
How Do We Ensure Our Crypto Financials Are Audit-Ready?
Maintain a clear audit trail for every transaction, use tools like KoinX Books for reconciliation, apply consistent valuation methods, and include footnotes for any estimates or risk assumptions.
