SEC tells crypto exchanges to reflect clients’ cryptocurrency holdings on balance sheets

Exchanges listing cryptocurrencies will be required to reflect on their balance sheets the digital assets they hold for clients. This follows updated SEC accounting guidance, Wall Street Journal reports.

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The document reflects SEC Chair Gary Gensler’s warning that crypto holdings on trading platforms effectively amount to “unsecured loans” to investors.

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Custodied client cryptocurrencies will need to be accounted for as assets on the exchange, while the liabilities to them — in the liabilities section.

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Currently, as traditional brokers do, platforms disclose the total value of digital assets belonging to their clients in the accompanying financial statements.

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The publication notes that Coinbase, in its 2021 annual report, showed assets worth $21.3 billion on its balance sheet, while client cryptocurrencies at that date were valued at $278 billion.

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The SEC’s recommendations for crypto platforms contrast with the approach taken by traditional brokers. The latter disclose customer funds on off-balance-sheet accounts. This stems from a legal precedent that established that, in the event of bankruptcy, assets belong to customers.

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According to SEC officials, the law does not take cryptocurrencies into account.

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“Liabilities in these agreements are tied to unique risks that do not exist in asset-protection agreements unrelated to cryptocurrencies. These risks may have a material impact on the company’s operations and financial condition,” the document explains.

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Earlier in 2021, the US urged the Financial Accounting Standards Board to develop reporting requirements for companies with crypto asset holdings.

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Earlier, Gensler urged Congress to bring clarity to the regulation of Bitcoin exchanges. Later he said that the latter should comply with investor protection requirements, similar to those applied in stock and derivatives markets.

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In January 2022, the SEC promised to tighten oversight of Bitcoin exchanges.

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