SEC Tells Crypto Platforms To Consider Client Crypto Assets As ‘Liabilities’

April 1, 2022 1:46 pm

The SEC has recently told companies that hold digital assets on behalf of their customers should now consider those assets as liabilities.

As a result, they have been advised to tell customers and investors that there is risk associated with those assets if they continue holding it.

There are many things that this recent change could imply, but it shows that investors and holders who hold significant amount of crypto might want to consider holding them in a private wallet instead.

The recent regulatory landscape has been somewhat unpredictable so far as 2022 has been labeled by the industry as the year of regulation after the tremendous growth that was experienced back in 2021.

The SEC has labeled that digital assets would have risks that other assets typically do not have have.

CoinDesk shares:

Technological risks – There are risks with respect to both safeguarding of assets and rapidly-changing crypto-assets in the market that are not present with other arrangements to safeguard assets for third parties.

Legal risks – Due to the unique characteristics of the assets and the lack of legal precedent, there are significant legal questions surrounding how such arrangements would be treated in a court proceeding arising from an adverse event (e.g., fraud, loss, theft, or bankruptcy).

Regulatory risks – As compared to many common arrangements to safeguard assets for third parties, there are significantly fewer regulatory requirements for holding crypto-assets for platform users, or entities may not be complying with regulatory requirements that do apply, which results in increased risks to investors in these entities.

Whether these risks are big enough to discourage crypto platforms that are listed publicly from continuing to do business is still yet to be determined, but many will have no choice but to follow in order to remain compliant with the SEC.

For example, Coinbase is one prominent exchange platform that has now listed a total of $270 billion in assets and liabilities held on behalf of its customers which is a significant amount.

Compared to last year where it was less than $30 billion, it could be pretty clear that the exponential growth is what prompted regulatory rules to be released.

The treatment here though is very different to traditional brokerages that don’t put their customer assets and record them as liabilities.

BusinessInsider reports:

The guidelines contrast with those for brokerages, which don’t have to put customer assets on their books. The SEC pointed to particular risks involved with crypto assets and platforms for taking a different approach.

“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,” it said.

It called out the lack of precedent on how crypto custody would be treated in court, and the regulatory risks.

It said there are significantly fewer regulatory requirements for holding crypto, while companies may not comply with the few regulations that do exist, increasing risks to investors.

Investors of crypto who are looking to play on the safe side and hold large amounts will most likely be encouraged to not be over dependent on exchanges as a custody service.

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