Author: Viki_Nan.mp3 First of all, this article is not about FUD (Fact-Depth) analysis of Hashkey or HSK, but rather about sharing my understanding from an accounting perspective. Having been deeply involved in the financial auditing of A/H-share listed companies, I believe few people can simultaneously: understand accounting standards, understand cryptocurrencies, and be willing and able to express their understanding without restrictions. I hope my interpretation can help HSK token holders understand the accounting treatment of Hashkey's IPO and its potential impact on the classification of HSK tokens from another dimension. I. Background and Definition: Items Recorded for Exchange-Issued Tokens – Contractual Liabilities or Financial Liabilities? Consensus on the Asset Side: Relatively uniformly, digital assets are recorded as inventory/intangible assets; there is little controversy here. Although there are no clear international accounting standards, this is considered a reasonable classification method within the industry. You can look at OSL's financial statements; the classification of digital assets is basically the same as Hashkey's prospectus. US standards differ slightly (you can look at Coinbase's financial statements), but we won't discuss that here. The Divergence on the Liabilities Side: How Should Exchanges Record Their Own Platform Token HSK? First, let's understand why it's considered a "liability." Because the exchange is the issuer of the token, issuing the token constitutes an "obligation." However, since very few publicly listed companies issue platform tokens, there are almost no precedents for this treatment. I found another Canadian listed exchange that issued its own platform token, INX, as a comparative case. HashKey (according to IFRS 15): Classified as a contractual liability (defined as a "performance obligation"—the company doesn't owe HSK holders money, but rather future services, such as fee deductions, membership benefits, etc.). INX (according to IFRS 9): Classified as a financial liability (the token represents a claim by INX holders on the company's future cash flows or assets). Key Point: Why would a publicly listed company define its own tokens, traded on the secondary market, as a "performance obligation"? This classification can mitigate the volatility of the financial market. If classified as a financial liability, the token must be measured at fair value. A rise in the token price will lead to an increase in the company's debt and a sharp drop in profits (conversely, a fall in the price will lead to a reduction in debt and a surge in profits). If classified as a contractual liability, it can be locked at historical cost. II. Accounting Perspective: Deduction of Accounting Entries Related to Platform Token HSK and Interpretation of Prospectus Text. Based on years of experience dealing with financial statements, there are several passages in the financial reporting section of the prospectus that are worth noting.Because these are important explanatory statements with clear implications, they should be interpreted in conjunction with speculation about accounting entries: Accounting Entry Deduction: Initial Recognition (when HashKey distributes HSK as rewards to employees, KOLs, or liquidity providers) Debit: Operating Costs/Selling Expenses/Administrative Expenses/R&D Expenses (recorded at fair value on the grant date) Credit: Contract Liabilities. Note: This step is a cost expenditure and will directly reduce current period profits. The prospectus shows that HSK's related costs reached HK$176.7 million in 2024. This is why the prospectus includes these two sentences: The increase in contract liabilities is mainly due to the increase in HSK distribution. (Increased distribution = more debt owed); Fluctuations in HSK's operating costs and expenses have impacted our operating performance. (Paying wages/purchases with cryptocurrency, more cryptocurrency distribution means higher costs). Intermediate State (Holding Period): Price fluctuations do not affect the liability balance because historical costs are already locked in. Derecognition (when a very small number of users return HSK to offset transaction fees, or when revenue is recognized based on breakage rules): Debit: Contract Liabilities Credit: Operating Revenue. Note: "Fluctuations in the HSK market price have not and are not expected to have any significant impact on our contract liabilities or subsequently recognized related revenue." (Historical cost measurement: Even if the HSK price declines in 2025, the company's balance sheet will not shrink or benefit as a result). III. What is Contract Liability Breakage? What effects will the 95% HSK Breakage have? Concept Breakdown: First, we need to understand contract liabilities and what breakage (loss/unexercised rights) is. Contract liabilities are services that the company owes to users (such as the right to offset transaction fees), which is a performance obligation. Breakage: The portion of the right that the company expects users will never exercise. In traditional industries (such as Starbucks), this usually refers to users losing gift cards; in Web3, it may refer to users voluntarily giving up the discount for hoarding and speculation. Data Perspective: Management estimates: 5% will be used (utilization), 95% is dead/unexercised (breakage). Actual Data: 0.49% – 1.71% actual utilization rate. Financial Consequences: According to the IFRS 15 proportional recognition method, the formula for recognizing revenue is essentially: Revenue Recognition = Actual Usage Amount / Expected Total Utilization Rate. Substituting HashKey's data (expected utilization rate 5%): Revenue Recognition = Actual Usage Amount / 5% = Actual Usage Amount * 20. Financial statements will use a 20x acceleration to recognize revenue based on management's accounting estimates. For every 1 dollar actually deducted by a user, the statement recognizes 20 dollars in revenue.IV. Two Key Misalignments – The Reasons for 95% Dead Coins Misalignment 1: Misalignment of Identity (Circulation Chain Analysis). Company -> Supplier/Employee: Paid as wages (included in Hashkey costs). Supplier -> Investor: Sold off to cash out (disruption occurs). Investor: Hoarded coins waiting for price increases (abandoned use). Conclusion: Those who receive the coins don't keep them, and those who keep the coins don't "use" them; the utility attribute is largely ineffective (95% breakage). Misalignment 2: Misalignment of Token Positioning. Company Perspective: For the company, the token is a contractual liability. Investor Perspective: For the investor, the token is a financial asset. The misalignment lies in: Normally, contractual liabilities correspond to contractual assets, and financial liabilities correspond to financial assets; this is how the two sides of the counterparty handle their respective accounts. The current misalignment is: Contractual Liabilities VS Financial Assets. V. Alternative Assumptions – If not contractual liabilities, which other account might it be included in? Hypothetical Deduction: What if it's classified as a financial liability (similar to the treatment of INX)? Measurement Logic: Fair value measurement. Financial Impact: Price increase = large loss; price decrease = large profit. Comparison: The profit statement will change from "revenue-driven" to "investment income-driven," and the fluctuations will be extremely drastic. Why choose contractual liabilities? To avoid the volatility of profit surges/declines caused by price increases. To lay the groundwork for growth in main business revenue. Utilizing IFRS 15 rules can achieve a smooth release of profits. VI. The Paradox of Auditing and Compliance—Accounting Standards Lagging Behind the "Gray Zone" Brought About by Web3 Development The Challenge of Substance Over Form: Legal Form: HSK does not meet the definition of a financial liability or equity instrument. And as long as the deduction function exists, it is a performance obligation. Economic Substance: 95% or even more people regard HSK as stocks for speculation. The phrase "housing is for living in, not for speculation" can be applied to HSK tokens to understand it as "currency for use, not for speculation." The auditor's dilemma: Why accept a 5% expected usage rate? Because there's historical data of 0.49%, which is management's accounting estimate. Essentially, management is taking the blame, and the amount of revenue recognized from this portion has little impact. From an auditing perspective, it's compliant, but the logic needs further examination. This reflects the lag of accounting standards in the face of Web3. VII. Reflections for token investors: The dilemma of HSK holders: You hold an asset explicitly defined as a "contractual liability" by the issuer; should you still consider it a "financial asset"?Risk warning: If the ecosystem truly prospers and users start using HSK for deductions in large quantities (although the possibility is extremely small), and the 95% breakage assumption collapses, will the company face a revenue loss?
Exchange Token Accounting Treatment: HashKey’s HSK and the Liability-Asset Disconnect
The accounting treatment of exchange-issued platform tokens represents one of the most significant yet underappreciated factors in evaluating the fundamental value of these digital assets. HashKey’s approach to classifying its HSK token as a “contractual liability” rather than a “financial liability” offers a fascinating case study in how structure can create divergent economic realities between issuer and investor.
Accounting Classification: A Tale of Two Standards
HashKey’s classification of HSK under IFRS 15 as a “contractual liability” represents a deliberate strategic choice. By defining the token as a performance obligation (future services, fee deductions, membership benefits) rather than a financial liability under IFRS 9, the exchange effectively decouples its financial performance from token price movements. This is a brilliant accounting maneuver that prevents rising token prices from inflating the company’s debt and eroding profits—a scenario that would occur if classified as a financial liability requiring fair value measurement.
The implications are stark: under the current model, token price appreciation benefits HSK holders without directly impacting HashKey’s financial statements, while price depreciation doesn’t hurt the exchange’s reported earnings. This creates a favorable narrative for the company while potentially misrepresenting economic reality.
The 95% Breakage Rate: Utility vs. Speculation
The most damning revelation in this analysis is the 95% breakage rate—meaning only 5% of issued HSK tokens are expected to be used for their intended purpose (fee deductions). With actual utilization rates between 0.49% and 1.71%, the data suggests that HSK functions primarily as a speculative vehicle rather than a utility token.
This creates a fundamental misalignment: the company accounts for HSK as a contractual liability representing future services, while investors overwhelmingly treat it as a speculative asset. The company’s accounting entry (debiting operating expenses, crediting contract liabilities) effectively converts what the market views as an appreciating asset into a cost center for the exchange.
Revenue Recognition Through Breakage Accounting
The most remarkable aspect of HashKey’s accounting treatment is the 20x revenue acceleration mechanism enabled by the 95% breakage assumption. Under IFRS 15’s proportional recognition method, every dollar actually used for fee deductions translates to $20 in recognized revenue. This accounting technique allows HashKey to recognize substantial revenue from tokens that are largely unused, creating a smoothed earnings profile that may not reflect actual business performance.
From an investor perspective, this raises critical questions about the sustainability of this revenue recognition method. If the ecosystem were to actually thrive and token utilization increased significantly, the 95% breakage assumption would collapse, potentially leading to a dramatic reduction in reported revenue.
Market Implications and Investor Considerations
This accounting treatment creates several important considerations for exchange token investors:
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Decoupling of Token Price and Fundamentals: The contractual liability classification reduces the direct link between token price and exchange financial performance, potentially allowing token prices to decouple from fundamental metrics.
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Regulatory Arbitrage Risk: As accounting standards evolve to better capture Web3 economic realities, this treatment may be viewed as exploiting regulatory gaps, potentially leading to restatements and negative consequences.
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Valuation Disconnect: The market may continue to price exchange tokens based on speculative potential rather than utility, creating a valuation bubble disconnected from actual usage metrics.
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Competitive Differentiation: Exchanges with tokens that demonstrate genuine utility and lower breakage rates may gain a competitive advantage as investors increasingly scrutinize actual usage data.
The Broader Web3 Accounting Challenge
HashKey’s case exemplifies a broader challenge facing the crypto space: accounting standards that lag behind innovation. The current framework forces companies to choose between legal form (contractual liability) and economic substance (speculative asset), creating a “gray zone” that benefits issuers but may mislead investors.
As more exchanges and platforms issue their own tokens, we can expect increased scrutiny from both accounting standard setters and securities regulators. The disconnect between how issuers account for tokens and how investors perceive them represents a fundamental information asymmetry that market participants must navigate.
Conclusion: Beyond the Accounting Treatment
For investors, the key takeaway is that exchange tokens like HSK should be evaluated through multiple lenses: accounting treatment, actual utility, and market sentiment. The contractual liability classification may provide short-term benefits for the issuer, but the 95% breakage rate suggests a token that functions primarily as a speculative vehicle rather than a utility asset.
As the crypto market matures, we can expect accounting standards to evolve, potentially closing the current loopholes that allow exchanges to structure their tokens in economically contradictory ways. Until then, investors must remain vigilant in examining not just what exchange tokens are marketed as, but how they’re accounted for and—more importantly—how they’re actually used.