Accounting Implications of Airdrops

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Marco Santori and the team at Blockchain (the wallet application) released a whitepaper last week providing a framework for issuers of airdrops. This paper looks at airdrops through the primary purview of U.S. corporate securities law. While this is one of the most important considerations airdrop issuers must take into account in the United States, I would like to take a look from the user and accounting perspectives.

Overview

In quick summary, the paper advocates the following considerations for issuers of airdrops:

  1. Direct: Do not use 3rd party intermediaries like exchanges to get tokens in the hands of users.
  2. Targeted: Send them out to a specific community, but must be sufficiently broad.
  3. Accessible: Users should not pay for airdropped tokens.
  4. Deterministic: Distribution should be free of “chance” or a lottery-like system.
  5. Functional: Most importantly, airdropping tokens must be with the intent for users to actually use them, and further decentralize the network.

Airdrop Accounting in a Nutshell

Massive amounts of airdrops took place in 2017 on the Ethereum network during the ICO-craze. For an environment with the values of privacy and autonomy, it does seem a little strange that a project that a user may not have heard of, nor may like, nor may agree with, could suddenly have that project’s assets sitting in their wallet.

This presents an issue for the user. Should they decide to move those tokens, it becomes a taxable event that they must calculate a gain or loss on. For a business, these assets must be assigned a value and accounted for on their balance sheet. [If your company wants help with airdrop accounting, feel free to reach out to the team at VeriLedger.]

Thoughts on the Issuer Framework

While the framework presented in this whitepaper may be helpful for issuers, it can lead to frustration for wallet holders. There were two points in the framework I found particularly problematic given the current regulatory environment. The first is the notion of accessibility. If an airdropped token is classified as an asset, it is odd to give them away for free. Like most other assets, there should be some sort of trade, or value exchange, to make the asset valuable. It would also be more advantageous to the user if there was some sort of positive confirmation that they actually want to receive the asset; in that way, they are not surprised by assets they didn’t ask for that now need to be reported.

The second, more structural, issue I have with the framework is the notion that a wide distribution decentralizes the network. If an asset is airdropped to many wallets and not adopted (like many are), I would pose that the network is not truly decentralized.

Those entities that are looking to airdrop tokens should, in addition to following the legal framework, understand that they have a burden to make sure that wallet holders a) know what these tokens are, b) how to use them, and c) actually want them.