SEC Staff Issues Release on Accounting and Disclosure for Parties Safeguarding Crypto Assets | Practical Law

SEC Staff Issues Release on Accounting and Disclosure for Parties Safeguarding Crypto Assets | Practical Law

The SEC staff issued Staff Accounting Bulletin Number 121, which sets out the views of the staff on accounting and disclosure duties related to the safeguarding of crypto assets held by a party for its platform users.

SEC Staff Issues Release on Accounting and Disclosure for Parties Safeguarding Crypto Assets

by Practical Law Finance
Published on 11 Apr 2022 • USA (National/Federal)
The SEC staff issued Staff Accounting Bulletin Number 121, which sets out the views of the staff on accounting and disclosure duties related to the safeguarding of crypto assets held by a party for its platform users.
On March 31, 2022, the SEC staff issued Staff Accounting Bulletin Number 121 (SAB 121), which sets out the views of the staff on accounting and disclosure duties related to the safeguarding of crypto assets held by a party for its platform users. The effective date of the bulletin is April 11, 2022. SAB 121 recommends that an obligation to safeguard crypto assets held for platform users should be presented as a liability on the balance sheet of the entity that is responsible for safeguarding the assets. Safeguarding includes maintaining the cryptographic key information necessary to access the assets.
The safeguarding liability should be measured at initial recognition and at each reporting date as the fair value of the crypto assets that the party is responsible for holding for platform users. SAB 121 specifies that notes to financial statements should include clear disclosure of the nature and amount of crypto assets that the entity is responsible for holding for its platform users, with separate disclosure for each significant crypto asset, and the vulnerabilities the entity has due to any concentration in such activities. Among other things, the safeguarding party should provide disclosure about who:
  • Holds the cryptographic key information.
  • Maintains the internal recordkeeping of those assets.
  • Is obligated to secure the assets and protect them from loss or theft.
The entity should include disclosures regarding how fair value is determined and describe the accounting for the liabilities and corresponding assets in the footnotes to the financial statements. Under existing SEC rules, disclosures regarding significant risks and uncertainties associated with an entity holding crypto assets for its platform users may also be required outside the financial statements, such as in:
  • The description of business.
  • Risk factors.
  • Management’s discussion and analysis of financial condition and results of operation.
SAB 121 is specific to entities that:
  • File reports or registration statements pursuant to sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) and the Securities Act of 1933 (Securities Act).
  • File offering statements or post-qualification amendments under Regulation A of the Securities Act.
  • Have periodic and current reporting requirements under Regulation A.
  • Are private operating companies whose financial statements are included in filings with the SEC in connection with a business combination involving a shell company.
In a March 31, 2022 response to SAB 121, Commissioner Hester M. Peirce expressed her position that the bulletin was an example of the SEC's disorganized and inefficient approach to cryptocurrency and took issue with:
  • The timing of the changes because the risks cited in SAB 121 are not new, so there was no imperative to address the topic at the current time.
  • The failure of SAB 121 to acknowledge that the lack of regulatory guidance in this area has created the risks that it cites as justifying this new accounting treatment.
  • The method of communicating the changes called for in SAB 121, as the bulletin is granular and tailored to a limited number of companies, not a broad audience, as are most bulletins.
  • The lack of deliberateness and engagement with affected parties.
For further information on regulation of digital assets, see the following Practical Law resources: