Crypto Accounting Must Evolve – Unboxing the Recent SEC Bulletin

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Crypto-assets still have many accounting and financial reporting issues that need to be resolved, it almost goes without saying. In the same way, however, attempting to regulate or clarify regulatory actions through market edicts is neither sustainable nor likely to achieve the desired effect. Especially as hacks and breaches continue to dominate the headlines around the crypto-asset industry, with the Axie Infinity hack – totaling over $600 million – being simply the most recent reported event.

As crypto-assets continue to permeate the investment and financial services landscape, including the investments of nations and financial institutions, the need for more enforceable accounting standards cannot be overlooked. Accounting rules and standard setting may not be the most scintillating or exciting aspects of the crypto conversation, but they are critically important. Markets and asset classes that have reached multi-billion dollar valuations simply cannot continue without proper and well-thought-out valuation, accounting and reporting standards.

Regulation, both in the United States and in other jurisdictions, has been – to date – a patchwork of often ambiguous and sometimes contradictory commentary, postings and opinions. Worse still, the enforcement mechanisms of these different regulations can be described as inconsistent at best. That’s why, although it looks like positive progress, regulation, or even an attempt at regulation, issuing a bulletin or montage is not the right approach.

Let’s take a look at what’s in the recent Staff Accounting Bulletin (SAB) and why these implications aren’t as obvious as they first appear.

Ballots are not binding. The first thing any market participant, investor, or business owner should keep in mind is that this SEC bulletin, or any other bulletin for that matter, is not binding law. No matter how much discussion or debate a specific bulletin has in the mainstream media, it doesn’t change the fact that those bulletins are not binding law. Much like how the Internal Revenue Service (IRS) can post Frequently Asked Questions (FAQs) and speak out publicly about cryptography issues, the formalized legal requirements of the IRS are those that were enacted via amendments to the Tax Code.

That said, while not per se binding, this bulletin provides insight into current thinking on how crypto should be treated in the future.

Technical blur. Even though the bulletin itself is not enforceable as law, it is worth noting how much specificity and direction has been included in this short document. Two main points stand out when this bulletin is examined. First, it is recommended that organizations offering custody services on crypto-assets traded by their owners be listed in financial statements. This representation would result in the constitution of a liability on the balance sheet linked to the risks of offering childcare services, and that this liability would also be offset by an asset.

While it is true that custodian companies, including those offering said services in the crypto space, are often already trying to do so, the fact that ratings are so high could indicate that further clarification on this issue is yet to come. . Second, this bulletin also recommends that organizations disclose and report the risks and costs related specifically to crypto-assets which include legal, regulatory, technical and financial risks.

Such a specific accounting recommendation, coupled with fairly broad (some would say vague) risk categories, makes this bulletin an interesting combination of specificity and vagueness for implementation purposes.

Narrow applicability. Whenever the SEC or other regulator issues a statement or even potential advice regarding cryptoassets, there are always headlines and discussions that follow. Despite this, and fully acknowledging that these regulators exercise formal enforcement power and informal power in influencing the behavior of organizations, this bulletin is relatively limited in its applicability. Since the SEC only has jurisdiction and enforcement authority over publicly traded organizations in the United States, this means that a relatively small number of companies will be impacted by this bulletin in any way.

It is worth pointing out that the timing of this newsletter is almost as interesting as the content of the newsletter itself. Although the number of organizations directly supervised by the SEC and subject to possible future rules is small, the growth of the crypto-asset sector has been quite rapid. Along with the growth of centralized exchanges and platforms, the decentralized finance (DeFi) space has been in the midst of a rapid growth phase. However, with this growth, there has also been a recent wave of hacks, resulting in billions in losses for investors.

This bulletin could be a warning to the DeFi sector that, although not directly under the supervision of the SEC, the Commission monitors the development of the sector.

Crypto regulation and policy-making is neither a simple nor straightforward undertaking, with multiple stakeholders needing to be consulted to develop a comprehensive and logical outcome. That said, virtually every rule-making body has issued statements, opinion pieces, and other non-binding guidance as the industry continues to rapidly evolve, which can make navigating this space challenging. so much more complicated. It’s complicated, but not impossible, and each new statement – ​​binding or not – actually makes the space clearer for users, investors and policy makers. As always, proactive individuals and companies that actively stay abreast of changes in the space will be rewarded for their efforts.

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