SEC Issues Disclosure Guidance to U.S. Cryptocurrency Exchanges, Firms

SEC Crypto Exchange Guidance Accounting Bulletin Overview: 

• Who: The U.S. Securities and Exchange Commission (SEC) has issued new guidance to exchanges and firms, which provide cryptocurrency services and hold digital assets. 
• Why: The SEC is asking exchanges who provide cryptocurrency services to list their crypto holdings on their balance sheets to be more transparent with and protect investors. 
• Where: The guidance was issued to firms and exchanges nationwide.

The U.S. Securities and Exchange Commission (SEC) has issued new guidance for U.S. exchanges and firms that hold digital assets for clients and provide cryptocurrency services.

Companies that work to safeguard cryptocurrency holdings should, going forward, make sure to list it on their balance sheets as a liability and offer greater disclosures to any prospective investors, according to the SEC. 

The SEC, which issued the guidance in an accounting bulletin last week, noted the unique regulatory risks and legal challenges of holding digital assets such as cryptocurrency, including a lack of legal precedent for issues including bankruptcy and theft. 

“These risks can have a significant impact on the entity’s operations and financial condition,” the SEC said. “The staff believes that the recognition, measurement and disclosure guidance in this SAB 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 Guidance Directed at Registered Entities, Private Companies

The SEC directed the new guidance at various entities, including ones that are registered with the agency, along with private companies and those that operate with less requirements for disclosures. 

Less regulation in the cryptocurrency industry was also a point of concern for the SEC, which noted in its bulletin that “entities may not be complying with regulatory requirements that do apply, which results in increased risks to investors in these entities.” 

Requiring an exchange or firm to list cryptocurrency holdings on its balance sheets, meanwhile, will “reflect its obligation to safeguard the crypto assets held for its platform users,” the SEC said. 

Further, the SEC said firms and exchanges should also disclose which assets they are holding along with their fair market value. 

“Loss exposure is based on the significant risks associated with safeguarding the crypto-assets held for its platform users,” the SEC said. “The staff believes it would be appropriate to measure this safeguarding liability at initial recognition and each reporting date at the fair value of the crypto-assets that (the entity) is responsible for holding for its platform users.” 

Last month, the SEC issued new guidance asking public companies to make disclosures regarding the climate impacts and risks they contribute.

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