According to US GAAP and IFRS guidelines, the most appropriate valuation methodology is a price that is highly correlated with an executable price in contrast to an average price (including a VWAP, TWAP, etc) which is not considered to be fair market value.
Additionally, ASC 820 (FASB, 2011) indicates that if there is a principal market for the asset or liability, the fair value measurement shall represent the price in that market. For a benchmark to be relevant, the benchmark price should be at least approximately tradable on an accessible market
Yes, it was specifically designed to align to GAAP and IFRS in absence of formal standards for crypto markets and then it was tested and challenged by thought leaders, accounting and audit firms, and industry experts for two years before it was offered as a data product. You can download the methodology whitepaper here.
Lukka Prime is aligned to new SEC Guidance on Fair Value Determinations: § 270.2a-5: “The board of the fund must determine fair value in good faith for any or all fund investments by carrying out the functions required in paragraph (a) of this section. The board may choose to designate the valuation designee to perform the fair value determination relating to any or all fund investments, which shall carry out all of the functions required in paragraph (a) of this section, subject to the requirements of this paragraph (b).”
Yes, as of April, 2021, IRS FAQ’s 10-13, 15, 17, 18, 20, 21, 24-28, 32, 35, 40, and 46 all specify using a fair market value methodology to determine taxable income, gains and losses on crypto asset transactions when possible.
A FMV should be used when the party has an obligation to comply with US GAAP or IFRS, or when the application of the data requires an executable market price such as when striking NAV, (Net Asset Value), performing financial reporting, tax compliance, or as a best practice when creating indices. Indices may choose to use a FMV as a best practice because it is compatible with how fund assets are valued and because an actual executable price is tradable for hedging purposes.
VWAPs are more commonly used for pre-trade analysis, certain instances of transaction cost analysis, and when the application of the data does not require an executed market price. TWAPs and VWAPs do not represent real, executed prices or tradable prices, however, they are used in indices frequently and can be useful provided the user understands the underlying methodology and it is appropriate for their use case.
Factors such as exchange jurisdiction, local regulation, and Know Your Customer (KYC), and Anti-Money Laundering (AML) are among the factors considered when evaluating exchanges for the primary market.
As of Q3 2022, Lukka Prime considers Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, Crypto.com, FTX, FTX.US, Gemini, HitBTC, Huobi, Kraken, KuCoin, OKEx, Poloniex. Lukka Prime eligible exchanges are reviewed quarterly.
Service Organization Company (SOC) Controls are those put in place by a service organization in order to give their customers assurance that internal risk controls are in place; these internal controls are audited by an independent auditor usually annually.
For more information regarding SOC Controls, please visit the Lukka Trust Center.