US Firms Providing Custody Services Should Account for Crypto Assets as Liability, Disclose Risk, SEC Says

The guidance would apply to U.S.-listed exchanges and other firms providing cryptocurrency services and holding digital assets on behalf of clients.

By Kevin Reynolds

Mar 31, 2022 at 4:45 p.m. UTC

Updated Mar 31, 2022 at 6:44 p.m. UTC

(Andrew Harrer/Bloomberg via Getty Images)

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Companies listed in the U.S. that act as custodians of cryptocurrencies on behalf of other companies should account for those assets as liabilities and disclose the risk associated with those assets to investors, the Securities and Exchange Commission said Thursday.

In its guidance, the SEC said the custody of digital assets on behalf of others has risks not present with other assets:

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).
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.

These risks can have a "significant impact" on the custodian's operations and financial conditions, the SEC guidance said. Because of this, the risks should be disclosed and the assets be accounted for at fair value and listed as a liability.

This story is developing and will be updated.

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