The SEC says crypto platforms that hold customers’ stashes must treat them as their own assets and liabilities

• The SEC said Thursday crypto platforms should treat customer holdings in custody as their own assets and liabilities.
• The regulator’s guidance means the balance sheets of publicly traded firms with crypto in custody could grow hugely.
• The SEC said there are unique legal, regulatory and tech risks that could have a big impact on a crypto platform.

Crypto-trading platforms that look after digital holdings for customers should book these on their balance sheets as their own liabilities and assets, the Securities and Exchange Commission has said.

They should also disclose the nature and amount of crypto assets held for customers in their company accounts, starting in June, the SEC said in guidance published on Thursday.

Crypto-trading companies that are publicly listed will have to make the change. Right now, they can record and disclose the digital assets they hold in custody on behalf of customers separately.

In future, any obligations to customers must be treated as liabilities, while any crypto assets held should be accounted for as an asset, the SEC indicated in its guidelines. This would likely enlarge affected companies’ balance sheets.

For instance, Coinbase listed $21.3 billion in assets and liabilities last year, according to a Wall Street Journal report. At the end of 2021, the exchange said it had $278 billion in both cryptocurrency and currency in custody for customers.

Cryptocurrencies have become more accessible to regular investors because of the growth of easy-to-use exchanges. The crypto market is worth around $2 trillion, according to Coinmarketcap data.

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The soaring popularity of crypto has pushed its regulation to the top of the SEC’s agenda, and a crackdown on digital assets is a key focus for the agency this year. 

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.

Under the current US legal framework, crypto exchanges don’t have a regulator that directly oversees their activity. SEC Chair Gary Gensler has said: “If the trading platforms don’t come into the regulated space, it’d be another year of the public being vulnerable.”