According to a new guidance by the Securities and Exchange Commission, US companies that hold cryptocurrencies for their customers must now account for those assets as liabilities, and warn investors about the associated risk.
This includes major players such as Coinbase, PayPal, Block (formerly known as Square), and Robinhood. In addition to crypto exchanges, the rules will also apply to traditional firms like banks and retail brokers that custody cryptocurrencies for clients.
In an accounting bulletin, the SEC pointed to the unique challenges associated with cryptocurrency.
“The obligations associated with these arrangements involve unique risks and uncertainties not present in arrangements to safeguard assets that are not crypto-assets, including technological, legal, and regulatory risks and uncertainties.”
Legal risks include a lack of legal precedent and an uncertainty about how the assets would be treated in court proceedings arising from adverse events such as fraud, loss, theft, or bankruptcy.
Regulatory risks arise from the fact that crypto-assets are subject to “significantly fewer regulatory requirements.”
The SEC’s statement is also based on the concern that some crypto companies “may not be complying with regulatory requirements that do apply, which results in increased risks to investors in these entities.”
The news could spell a challenging set of circumstances for major players like Coinbase.
Earlier this year, Coinbase reported record revenue of $2.5 billion for Q4 2021. Even amidst an ongoing BTC decline and bear market, the company was able to reverse a shrinking trend.
By the end of 2021, Coinbase held as much as $278 billion of users’ cryptocurrencies, up from $90 billion in 2020.
Robinhood, the mobile trading app, reported similar activity, holding over $22 billion in users’ crypto, out of a total $98 billion.