U.S. SEC says crypto safekeeping arrangements should be treated as liability

FILE PHOTO: Illustration shows representations of cryptocurrency Bitcoin
FILE PHOTO: A representations of cryptocurrency Bitcoin is seen in front of a stock graph and U.S. dollar in this illustration taken, January 24, 2022. REUTERS/Dado Ruvic

March 31, 2022

By Michelle Price

WASHINGTON (Reuters) – U.S. listed companies that hold cryptocurrencies on behalf of users and customers should account for those assets as a liability on their balance sheet and disclose the related risks to investors, the securities regulator said on Thursday.

The U.S. Securities and Exchange Commission (SEC) guidance would apply to a range of listed entities, including crypto exchanges and traditional firms such as retail brokers and banks that are increasingly providing cryptocurrency services and holding digital assets on behalf of a range of clients.

While there is a well-established standard under accounting rules for safeguarding traditional assets on behalf of clients, there is no explicit standard for safeguarding crypto assets and companies diverge in their treatment of these arrangements.

In its guidance, the SEC said there are “significant” technological, legal and regulatory risks associated with safeguarding crypto-assets and as a result they should be reflected as a liability on companies’ balance sheets.

“The technological mechanisms supporting how crypto-assets are issued, held, or transferred, as well as legal uncertainties regarding holding crypto-assets for others, create significant increased risks…including an increased risk of financial loss,” the SEC wrote.

Companies should also disclose “the nature and amount” of crypto assets they are responsible for holding, with separate disclosures for each significant crypto-asset, and any vulnerabilities resulting from concentration in such activities.

The underlying crypto assets should be accounted for at fair value, the SEC said.

Cryptocurrency platforms and wallets continue suffer major breaches, with hackers just this week stealing $615 million worth of cryptocurrency from blockchain project Ronin.

In addition, U.S. regulators remain undecided on how to treat cryptocurrencies, with regulators still discussing new rules for how banks should handle digital assets.

(Reporting by Michelle Price; Editing by David Gregorio)