Companies must disclose customer crypto holdings on balance sheets, says SEC

Mohadesa Najumi

The national government agency tasked with monitoring markets, enforcing securities laws, and developing new regulations, the U.S. Securities and Exchange Commission (SEC) has released new guidelines this week for exchanges.

On March 31, the securities regulator stated that U.S. listed companies that hold crypto-assets for customers should account for them as liabilities on their balance sheets and disclose the related risks to investors.

The new guidance will also apply to traditional firms such as retail brokers and banks that provide digital asset services or custody for clients.

The SEC mentioned that there are significant technological, legal and regulatory risks associated with safeguarding crypto-assets and as a result, they should be reflected as a liability on companies’ balance sheets.

The technological mechanisms supporting how crypto-assets are issued, held or transferred, as well as legal uncertainties regarding holding crypto-assets for others, create significant increased risks – including an increased risk of financial loss” the agency stated.

Companies should thus disclose the nature and amount of crypto assets they are responsible for holding, with separate disclosures for each significant crypto-asset, and any vulnerabilities resulting from concentration in such activities. The SEC has noted that the underlying crypto-assets should be accounted for at fair value.

This latest requirement only applies to registered and regulated crypto exchanges operating in the United States.

SEC Chairman Gary Gensler has previously warned that investors holding cryptocurrency on exchanges such as Coinbase effectively make unsecured loans to those companies. His reasoning for this is that traditional assets have well-established accounting standards for safeguards, but no such standard exists for digital assets as of yet, Gensler argues.

As it currently stands, the Internal Revenue Service (IRS) classifies cryptocurrencies as property. According to the IRS, investors need to declare their crypto profits and losses in their annual Income Tax return or through a Schedule D form.