The Flaws of Cash Flows (Part 2)
Statements of cash, stablecoin, and token flows
Managing liquidity is an even more difficult task if you work in crypto. Because even though you believe that your cash stays at the same level before and after you buy USDC for USD… Your accountant will prepare a cash flow statement that says otherwise. Let’s take a look at the impact of this difference between perceived and reported changes in liquidity.
Consider a hypothetical crypto business that has engaged in the following transactions during a certain period:
Here are the calculations supporting our further discussion:
First, we'll look at the flows of different types of liquidity and how these flows differ from one another:
As seen, the company’s activities resulted in:
net cash outflows of $(1,100,000),
net stablecoin inflows of $1,200,000, and
zero change in tokens.
The net effect of changes in all three sources of liquidity shows inflows of $100,000, which is drastically different from what is observed by analyzing cash flows alone. Now, let's take a more comprehensive look at how the financial position of the company is depicted in the financial statements.
The first and second transactions were executed without anticipating changes in future results or the company's position. These were one-to-one exchanges of cash for cash-like assets, primarily to acquire assets usable for blockchain transaction settlements. These initial transactions had no commercial substance, and it would be misleading to present these as cash flows.
Transactions 3 and 4(b) were investments, while transaction 4(a) was a like-for-like legal sale and purchase of the same asset, hence it also lacks commercial substance.
Transactions 5(a,b) represent proceeds from investing activities.
What’s the conclusion? We believe that current cash flow statements often create an inadequate representation of changes in a company’s financial position during the period. This inadequacy arises because these statements lack the capacity to capture the operating, investing, and financing activities that crypto-native companies settle in crypto. Further, the classification of certain activities among operating categories may result in the omission of information about these activities from the cash flow statement or footnote disclosures, leading to inadequate results in financial analysis.