Crypto Counts as Liability for Custody Companies, Says SEC

Companies holding cryptocurrencies for clients should treat them as liabilities on their balance sheet, the U.S. securities regulator said.

According to the guidance issued by the Securities and Exchange Commission, crypto should be treated as a liability on companies’ balance sheets due to the “significant” technological, legal, and regulatory risks inherent in safeguarding crypto-assets. 

“The technological mechanisms supporting how crypto-assets are issued, held, or transferred, as well as legal uncertainties regarding holding crypto-assets for others, create significantly increased risks… including an increased risk of financial loss,” the SEC wrote.

In its guidance, the SEC said that these custodians should also inform their clients as to “the nature and amount” of assets they are responsible for holding. 

They should also make separate disclosures regarding any vulnerabilities or related risks to investors for each significant asset. The SEC added that each underlying crypto-asset should be accounted for at fair value.

The SEC said the guidance would apply to a broad swath of listed entities that include not only cryptocurrency exchanges, but also more traditional financial companies, like banks and retail brokers.

In addition to crypto service platforms, these legacy financial firms are increasingly providing cryptocurrency services, such as custody of digital assets on behalf of their clients. 

Crypto assets retain a great deal of insecurity

The SEC issued the guidance in an effort to establish basic accounting rules for crypto assets, which lack the comprehensive safeguards of more traditional financial assets. Despite their increase in popularity and usage, cryptocurrencies still retain a great deal of insecurity regarding their safekeeping. 

Earlier this week, Ronin Network, an Ethereum-based sidechain for popular crypto game Axie Infinity, was hacked for over $620 million in ETH and USDC. 

According to an official statement, the attacker “used hacked private keys to forge fake withdrawals” from the Ronin bridge contract through a pair of transactions. The exploit, which occurred on March 23, was only discovered a week later when one user was unable to withdraw 5,000 ETH.