Crypto platforms such as Coinbase and other entities dealing in digital currencies should include tokens they hold for customers as assets and liabilities on their own balance sheets and inform the public about the potential risks of investments, according to updated guidance from the SEC.
The directive surfaced as the feds mull increased regulation of cryptocurrencies and press for more transparency on how platforms operate to protect consumers.
Investors are pouring money into Bitcoin and other digital assets at a rapid pace, driving the global crypto market cap above $2 trillion.
The SEC guidance instructed cryptocurrency platforms, banks and other financial institutions to record the tokens they hold on behalf of customers as assets and include their obligation to safeguard the stashes as liabilities beginning in June.
Under past guidelines, customer holdings were left off the platforms’ balance sheets – a practice that mirrored how publicly traded brokerages operate. The SEC said “uncertainties” specific to the largely unregulated crypto space – such as how assets would be handled in the case of fraud, theft or bankruptcy – required unique care.
“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 SEC said in a release.
The change will have a major effect on financial disclosures and accounting practices for major publicly traded platforms.
For example, Coinbase reported $21.3 billion of assets and liabilities at the end of 2021, though it held $278 billion worth of cryptocurrencies and other currencies on behalf of its customers, the Wall Street Journal reported.
Lawmakers and federal officials have expressed mounting concern that crypto investments pose a risk to the public given the lack of clear guidelines or oversight.
“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending,” SEC Chairman Gary Gensler said in prepared remarks to the Senate Banking Committee last September. “Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.”
Hackers pose another risk to crypto investors. Earlier this week, hackers pilfered $615 million in crypto from blockchain project Ronin in one of the largest thefts on record.
With Post wires