The Securities and Exchange Commission (SEC) expressed the views of the staff regarding the accounting for obligations to safeguard crypto assets an entity holds for platform users.
In recent years, there has been an increase in the number of entities that provide platform users with the ability to transact in crypto assets. In connection with these services, these entities and/or their agents may safeguard the platform user’s crypto asset(s) and also maintain the cryptographic key information necessary to access the crypto asset.
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. Specifically:
- Technological risks – there are risks with respect to both safeguarding of assets and rapidly-changing crypto-assets in the market that are not present with other arrangements to safeguard assets for third parties;
- Legal risks – due to the unique characteristics of the assets and the lack of legal precedent, there are significant legal questions surrounding how such arrangements would be treated in a court proceeding arising from an adverse event (e.g., fraud, loss, theft, or bankruptcy); and
- Regulatory risks – as compared to many common arrangements to safeguard assets for third parties, there are significantly fewer regulatory requirements for holding crypto assets for platform users or entities may not be complying with regulatory requirements that do apply, which results in increased risks to investors in these entities.
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 to an entity operating a platform that allows its users to transact in crypto assets. Accordingly, as long as the entity is responsible for safeguarding the crypto assets held for its platform users, including maintaining the cryptographic key information necessary to access the crypto assets, the staff believes that it should present a liability on its balance sheet to reflect its obligation to safeguard the crypto assets held for its platform users.
As the entity’s loss exposure is based on the significant risks associated with safeguarding the crypto assets held for its platform users, the SEC 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. That means it would be appropriate for the entity to recognize an asset at the same time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of the crypto assets held for its platform users.