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John Ward, Managing Director at Duff & Phelps was interviewed by FinOps on "Cryptoasset Valuation – Fair Value or Fair Game?"
Fair value – the term used by accountants to refer to the correct valuation of assets for financial reporting purposes – shouldn’t be taken at face value by fund managers or investors when comes to cryptoassets.
Anyone who comes to the table unprepared for a potential dispute is foolish as shown in a recent lawsuit involving Polychain Capital, the US’ largest cryptofunds. Despite making a killing on his investment, an investor sued Polychain asking for more information on the grounds that some of the assets were not valued correctly. Polychain did win the case but not after a year of litigation.
Although nothing prevents disgruntled investors from suing a mutual fund complex on similar grounds, the risk is far higher for cryptoassets because of their huge liquidity, potential illiquidity and lack of established valuation standards. Accounting experts compare the task to sticking a square through a round hole. How easy it will be all depends on the size of each. The more illiquid the cryptoasset the more subjectivity comes into play and the higher the potential for a disagreement between the fund and the investor and potential litigation.
“Investors can’t be certain fund managers are valuing their assets correctly and fund managers can’t be certain investors will be satisfied with their efforts,” says Gregory Ewing, a partner with CKR Law in Washington DC specializing in cryptoasset regulation. “These [cryptoassets] are entirely new asset classes that require fund managers and investors to apply old rules in new ways or to collaborate in new ways to find new rules that work better.
Read the full article.