A series of new standard crypto accounting rules are being drafted by the Securities and Exchange Commission to protect crypto assets held in digital wallets by exchanges against hacking losses. More trading platforms are allowing users to deal in crypto. Hacks becoming increasingly frequent so this move at this time makes sense.
A bulletin published Thursday by the SEC said it can be more challenging to protect crypto assets since they are prone to changing hands and prices more quickly than traditional financial assets. According to SEC officials, crypto exchanges holding crypto assets on behalf of investors are subject to far fewer regulatory requirements. Some of these companies may not be complying with current regulations properly.
“These entities and/or their agents may safeguard the platform user’s crypto-assets and also maintain the cryptographic key information necessary to access the crypto-asset,” SEC staff said. “The obligations associated with these arrangements involve unique risks and uncertainties not present in arrangements to safeguard assets that are not crypto-assets, including technological, legal, and regulatory risks and uncertainties.”
The SEC advised that an exchange or company holding cryptographic key information for a user or users’ crypto assets in digital wallets should account for those as a liability at the fair value of the crypto assets on their balance sheet and warn investors of the risks of safeguarding those assets. Financial statements should include clear disclosure of the nature and amount of crypto assets that the exchange is responsible for holding for users, with separate disclosures for each crypto asset, and the vulnerabilities the exchange has, the staff wrote.
Periodic reports would need to be filed to the SEC. The new rules will apply to all public companies registered with the SEC, starting after June 15.
“These risks can have a significant impact on the entity’s operations and financial condition,” the SEC noted. “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.”
These rules come as crypto theft continues to burgeon. The most recent hack came earlier this week when the popular blockchain game Axie Infinity, which lets users earn money as they play, said it lost $615 million in a hack—eclipsing the $611 million hack of the DeFi protocol Poly Network in August 2021.
Paypal, Square, investing app Robinhood and crypto exchange Coinbase are just a handful of companies that hold crypto on behalf of their users. As of the end of last year, Coinbase was storing $278 billion in its customers’ digital wallets at the end of 2021, representing approximately 11.5% of the total market capitalization of crypto assets at the time, according to the company’s 10-K filing.
“This bulletin is further evidence that the Commission needs to update its regulations concerning custody of digital assets,” Paul Atkins, CEO of Patomak Global Partners and a former SEC commissioner, told Yahoo Finance. “Instead of resorting to staff accounting bulletins to address custody risks, the Commission should update its custody rule to clarify how they apply to digital assets.”
The Chamber of Digital Commerce has been calling for crypto accounting standards for years.
“It is essential that businesses and investors of all types are able to clearly reflect the value of their assets on their balance sheets,” the organization said.
·Senior Reporter Yahoo Finance