Embedded derivatives in token deals: loans, options and crypto-settled payables

Crypto loans, market-maker calls, token warrants and crypto-denominated payables can hide derivatives that must be split out and marked to fair value.

2026-10-17 · 7 min read

If a contract you sign promises to deliver, return or receive tokens, the price of those tokens may be sitting inside it as a derivative. Under US GAAP that derivative is often separated and carried at fair value through earnings, so it changes your P&L even when nothing has been settled.

The basic test

A hybrid instrument is a host contract with a feature that behaves like a derivative. Under ASC 815-15-25-1, as Deloitte summarises it, the feature must be separated when three things are true: its economics are not clearly and closely related to the host, the whole instrument is not already measured at fair value through earnings, and the feature would meet the definition of a derivative on its own [1]. For crypto, the third test often turns on net settlement, meaning whether the token is traded actively enough to be readily convertible to cash [1].

Borrowing crypto

The clearest case is a crypto borrowing. Deloitte describes the borrower recognising the borrowed tokens and an obligation to return them, both at fair value on day one, and analysing that obligation as a host contract with an embedded forward indexed to the token price [1]. It says the first two separation criteria are typically met, so the outcome usually depends on net settlement [1]. If separated, the forward is marked to market through net income each period [1].

Real filings show the pattern. Coinbase's 2022 annual report, filed before ASU 2023-08 took effect, described its crypto borrowings as hybrid instruments: a liability host carried at the fair value of the assets acquired, not treated as debt because it is not a financial liability, plus an embedded derivative on the token price measured at fair value [3]. The same filing reported embedded derivatives on other payables, and on receivables and loans, denominated in crypto [3].

ASU 2023-08 changes the economics of this. Before it, the borrowed asset sat at cost less impairment while the embedded derivative moved with the market, a mismatch some entities tried to address with hedge accounting [1]. Now that in-scope crypto is at fair value through earnings, the asset and the embedded derivative tend to offset, and Deloitte notes hedge designation is no longer available for that mismatch [1].

Lending crypto

Lenders face a different question first: whether to derecognise at all. Current practice, as Deloitte describes it, is that where the borrower obtains control the lender derecognises the tokens and records a receivable measured at the fair value of the lent tokens, with an allowance for expected credit losses [2]. That may change. FASB staff told its advisory forum in October 2026 that the Board plans to propose that lent crypto stays on the lender's books, reclassified as encumbered and measured at fair value including the borrower's credit risk, with an exposure draft expected in the first quarter of 2027 [4].

Market-maker loans with call options

Token projects often pay market makers not in cash but through a loan-and-call structure. The project lends tokens for a term and grants a call option over them; at the end the market maker either returns the tokens or, if the price is above the strike, exercises and buys them [5]. The market maker's compensation comes from the option [5].

For the project, that is a loan of tokens plus a written option, and the accounting is not settled by any crypto-specific rule. Questions to work through include whether the tokens lent are the project's own tokens or tokens it acquired, whether the loan is derecognised, whether the call is a freestanding or embedded derivative that can be net settled, and how to measure and present it. Write the analysis down; a written call is a liability exposure that grows as the price rises.

SAFTs, token warrants and price protection

Investor-side instruments raise similar issues. A SAFT is a pre-purchase of tokens not yet minted, often at a fixed price or a discount to launch price, and often with a refund if tokens are not issued by a maturity date [6]. A token warrant gives the option, but not the obligation, to buy tokens at a set price before expiry, and is usually issued alongside equity or a convertible [6]. Discounts, refund rights, pro rata allocations and penny-strike terms all affect whether a derivative exists and how it is valued [6]. Treat each agreement on its own terms.

Under IFRS

IFRS has no crypto-specific guidance, so these contracts are analysed under existing standards [8]. Because the Interpretations Committee concluded in 2019 that cryptocurrencies are neither cash nor financial assets [7], an obligation to deliver tokens is generally not a financial liability, which shifts the analysis to whether the contract or a feature within it is a derivative on a non-financial item. Outcomes are judgemental and can differ from US GAAP; involve your auditors early.

What to do

• List every contract that references a token price or settles in tokens: borrowings, loans out, market-maker agreements, SAFTs, warrants, vendor or payroll payables in tokens.
• For each, record the host, the embedded feature and your conclusion on each separation criterion, including net settlement.
• Value separated derivatives at each close with a documented price source and model.
• Keep gains and losses on crypto remeasurement and on embedded derivatives in separately identifiable lines.
• Track the FASB transfers exposure draft expected in early 2027 if you lend tokens.

Sources

1. 8.3 Crypto Asset Borrowing (Deloitte (DART Roadmap: Digital Assets))
2. 8.2 Crypto Asset Lending (Deloitte (DART Roadmap: Digital Assets))
3. Coinbase Global, Inc. Form 10-K for the fiscal year ended December 31, 2022 (US SEC (EDGAR))
4. Accounting for Crypto Assets: Feedback and Standard-Setting Updates (ASAF, October 2026) (FASB staff, via IFRS Foundation)
5. Crypto Market Making Models: Retainer vs Loan/Call Explained (Flowdesk)
6. Key Considerations for the Prospective Blockchain Investor (Mintz)
7. Holdings of Cryptocurrencies—June 2019 (agenda decision) (IFRS Interpretations Committee)
8. Cryptoassets: Your questions answered (KPMG IFRG)

General information for finance teams, current as of publication. Not legal, tax or accounting advice.

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