SEC Staff Explain Accounting for Custody of Crypto-Assets
Commentary by Steven Lofchie
In an Accounting Bulletin ("SAB"), SEC staff delineated an entity's accounting obligations as to crypto-assets that the entity holds in custody for others. The SAB was published in the Federal Register.
In the SAB, SEC staff described various risks inherent in providing custody for crypto-assets, including technology risks, legal risks and regulatory risks. The SAB provides that a custodian must take on to its books as both assets and liabilities the entire value of the crypto-assets it holds. The SAB also requires that the entity provide disclosures as to the various risks of holding crypto-assets.
In a statement, SEC Commissioner Hester M. Peirce characterized the SAB as another example of the agency's "scattershot and inefficient approach to crypto." She also noted that the SAB was "unusual" and "unique," as opposed to being an ordinary course accounting pronouncement.
Commentary
It seems completely reasonable for a custodian of crypto-assets to disclose (i) the risks inherent in the business of acting as custodian, (ii) the value of the assets that it holds, and (iii) the custodian's potential liability if it fails to maintain control of the assets.
On the other hand, there seems to be no informational value in requiring the custodian to add the value of the assets it holds in custody to both sides of its balance sheet. Blowing up the custodian's balance sheet in this way does not improve the disclosure of the custodial risk; it simply makes it harder for investors to understand the entity's financials.