SEC Staff Call For Crypto Entities To Show Liability on Balance Sheet

Mem­bers of the US Secu­ri­ties and Exchange Com­mis­sion (SEC) penned a bul­letin Thurs­day out­lin­ing what they view as par­tic­u­lar­ly trou­ble­some for the cur­rent account­ing oblig­a­tions with­in the cryp­to industry.

SEC staff said they believed enti­ties should present a lia­bil­i­ty on their bal­ance sheet to reflect their oblig­a­tion to safe­guard dig­i­tal assets held for their plat­form users. 

Staff Account­ing Bul­letin Num­ber 121 (SAB 121) express­es the staff’s views and adds “inter­pre­tive” guid­ance for enti­ties to con­sid­er when they have oblig­a­tions to safe­guard dig­i­tal assets.

Enti­ties such as cryp­to exchanges and cus­to­di­ans — who are charged with main­tain­ing cryp­to­graph­ic keys of their users — face sev­er­al risks when stor­ing dig­i­tal assets on behalf of their cus­tomers, SEC staff said.

Com­men­tary from SEC staff fol­lows one of the industry’s largest hacks in his­to­ry, when an Ethereum-linked sidechain — uti­lized by blockchain game Axie Infin­i­ty — was exploit­ed for $625 mil­lion in ether and USDC last week. Exploiters used hacked pri­vate keys to forge with­drawals on March 23.

“The oblig­a­tions asso­ci­at­ed with these arrange­ments involve unique risks and uncer­tain­ties not present in arrange­ments to safe­guard assets that are not cryp­to-assets.” Those legal, tech­no­log­i­cal and reg­u­la­to­ry risks can have a “sig­nif­i­cant impact” on the entity’s oper­a­tions and finan­cial con­di­tion, they said.

State­ments in staff account­ing bul­letins are not rules or inter­pre­ta­tions of the SEC and sim­ply rep­re­sent the staff’s own inter­pre­ta­tions and prac­tices of fed­er­al secu­ri­ties laws.

The staff believes notes accom­pa­ny­ing finan­cial state­ments should include “clear dis­clo­sure” of the nature and amount of cryp­to that an enti­ty is respon­si­ble for hold­ing on behalf of its users.

Staff are also guid­ing enti­ties to form sep­a­rate dis­clo­sures for each sig­nif­i­cant cryp­to asset as well as noti­fy­ing the SEC of any vul­ner­a­bil­i­ties they may have due to “any con­cen­tra­tion in such activities.”

SEC Com­mis­sion­er Hes­ter Pierce, affec­tion­ate­ly known as “Cryp­to Mom” with­in the com­mu­ni­ty, shot back Thurs­day, call­ing the staff’s bul­letin a “scat­ter­shot and inef­fi­cient approach to crypto.”

“My con­cern is not with the account­ing deter­mi­na­tion itself, which may be appro­pri­ate, but with the way the change is being made,” Pierce said.

“A staff account­ing bul­letin may not be the appro­pri­ate vehi­cle through which to make this account­ing change and com­mu­ni­cate it to the public.”

Pierce also said SAB 121 is “unusu­al” among bul­letins because of its tar­get­ed guid­ance aimed at a “very spe­cif­ic, very lim­it­ed” num­ber of pub­lic companies.

“While past SABs have includ­ed state­ments sug­gest­ing com­pa­nies should con­sid­er the applic­a­bil­i­ty of oth­er dis­clo­sure require­ments out­side of the finan­cial state­ments, SAB 121’s gran­u­lar guid­ance is unique,” Pierce said. “If we are try­ing to encour­age com­pa­nies to enter our pub­lic mar­kets, we ought to embrace a more delib­er­ate approach to chang­ing rules — one that involves con­sult­ing with affect­ed parties.”

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