Crypto: SEC to crypto platforms: Your accounting practices aren’t up to snuff

The crypto ecosystem has seen rapid growth in the number of platforms that custody digital assets for customers, and the Securities and Exchange Commission was concerned that these firms were not being straight with investors as to the risks associated with this line of business.

The securities regulator issued new guidance Thursday to public crypto platforms, urging them to recognize crypto held on the behalf of customers as a liability and asset on their balance sheets, the value of which could be lessened due to the unique risks posed by cryptocurrencies like bitcoin

and ether

Crypto exchanges like Coinbase Global Inc.

would likely be impacted by the guidance, as could Paypal Holdings Inc.

and Robinhood Markets Inc.
All three are public companies that enable users to buy and sell crypto on their platforms, while offering to safeguard these assets.

The guidance noted that custody of crypto assets involved “unique risks and uncertainties” relative to other assets that are technological, legal and regulatory in nature. These risks included theft, fraud and the chance that new regulatory obligations could be placed on platforms that could impair the value of digital assets.

“These risks can have a significant impact on the entity’s operations and financial condition,” the staff accounting bulletin said. “The staff believes that the recognition, measurement and disclosure guidance…will enhance the information received by investors and other users of financial statements about these risks, thereby assisting them in making investment and other capital allocation decisions.”

SEC officials told reporters on a background call that many public companies were not applying the accounting standards outlined in the guidance, but that they believed most companies could become compliant with relatively little effort.

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