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SEC Allows Some Exceptions to Cryptocurrency Accounting Compliance (1)
The SEC has paved the way for banks and brokers to avoid reporting their clients’ cryptocurrency holdings on their balance sheets. But firms must offset the risks those assets pose to skirt controversial cryptocurrency accounting guidelines that have become a target of Congress.
The Securities and Exchange Commission staff has begun distributing guidance that certain agreements may not require a liability to be reported on the balance sheet under Staff Guide issued two years ago, said an SEC source familiar with the regulator’s approach.
Several large banks that consulted with SEC staff starting in 2023 have gotten the green light to bypass balance sheet reporting, ensuring their clients’ assets would be protected in the event of bankruptcy or bankruptcy. Other steps, such as internal safeguards to better protect those holdings, would address legal risks related to the burgeoning asset class, the source said.
The regulator believes the guidelines have worked and that companies have adapted to address the threats that hacking and corporate failures have posed to investors, the source said.
The SEC’s accounting stance could expand the range of firms that American cryptocurrency holders could choose from to house their growing portfolios. Creditors have argued that the accounting treatment effectively barred them from offering cryptocurrency services because larger balance sheets would trigger capital requirements set by banking regulators, not the SEC.
Banking and financial industry trade groups have urged Congress to rescind the staffing guidelines, which are effectively agency rules. The House failed to override a presidential veto of a measure that would have revoked what is known as Personnel accounting bulletin 121, effectively leaving the measure in force.
SEC staff issued guidance in 2022, months before the collapse of cryptocurrency exchange FTX, saying the special reporting was necessary to keep investors informed about the technological and legal risks posed by the nascent technology.
Coinbase Global Inc. and Robinhood Markets Inc. have been reporting the value of their customers’ cryptocurrencies on their financial statements since 2022.
According to the source, during closed-door consultations with SEC staff, the banks successfully argued that electronic wallets and exchange-traded Bitcoin spot products should be excluded from the scope of the cryptocurrency guidelines.
Financial institutions are increasingly eager to participate in the cryptocurrency space, especially now that the SEC has approved Bitcoin spot products, said Aaron Jacob, head of accounting solutions at TaxBit, which provides crypto accounting products for exchanges and investors.
“You can’t go to some of the largest and oldest financial institutions in America because they’re not allowed to play that game,” he said.