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U.S. listed companies that act as custodians of cryptocurrencies on behalf of their users should account for those assets as liabilities and warn investors about the associated risk, the U.S. Securities and Exchange Commission (SEC) said on Thursday.
The new guidance will apply to traditional firms such as banks or retail brokers that custody cryptocurrencies for their clients or provide other related services, as well as to crypto exchanges.
In a new accounting bulletin, the SEC said that the arrangements associated with digital currencies, such as the requirement to maintain the private keys to access the funds, “involve unique risks and uncertainties.”
Those risks are different from the risks associated with the arrangements performed to safeguard traditional assets, and “include technological, legal, and regulatory risks and uncertainties.
“There are significantly fewer regulatory requirements for holding crypto assets,” compared to traditional financial assets,” the SEC said.
The agency added that companies that custody crypto “may not be complying with regulatory requirements that do apply, which results in increased risks to investors in these entities,”
Since these risks can have a "significant impact" on companies’ operations and financial conditions, companies should clearly disclose "the nature and amount" of crypto assets they are holding. Each “significant” crypto asset should be accounted for at “fair value” and have separate disclosures, along with any vulnerabilities resulting from such activities.
The SEC added that disclosures regarding the significant risks and uncertainties associated with holding users’ crypto assets “may also be required outside the financial statements.” For example, these can include the description of business, risk factors, or management’s discussion and analysis of financial condition and results of operation.
What companies are affected?
SEC Chairman Gary Gensler has previously warned that cryptocurrency exchanges such as Coinbase “have dozens of tokens that may be securities.” In other words, investors effectively make unsecured loans to those companies.
Earlier this year, Coinbase revealed it made a record $2.5 billion in revenue in Q4 2022, while the exchange’s monthly active user base increased to 11.4 million.
At the end of the last year, Coinbase held as much as $278 billion of customers’ crypto, up from $90 billion in 2020. 40% of its customer holdings were in Bitcoin, followed by 25% in Ethereum.
Other large companies that hold cryptocurrency for their customers include PayPal, Block (formerly known as Square), and Robinhood.
Robinhood, a popular mobile trading app, reported that at the end of December 2021 tit held over $22 billion in customers cryptocurrencies—out of a total of $98 billion, while the total number of accounts grew to 22.7 million.