SEC Encourages Crypto Custody Platforms to Report Consumer Assets As Liabilities

Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.

The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 121 (SAB) at the end of March addressing the organization’s take on crypto custody regarding their obligation to safeguard crypto-assets for their customers, specifically those maintaining control of the private and public keys. The SAB suggests that these platforms should account for consumer assets as liabilities on their balance sheets moving forward. The SAB also regards the custody of cryptographic keys as an additional risk and liability, of which consumers should be made explicitly aware.

Much like a lawyer interprets and argues the law, the staff at the SEC interpret where and how crypto-assets fit into the preexisting legal framework to which the organization is bound. The growth of the crypto industry is heavily outpacing the ability of government institutions to define and regulate the multifaceted space. As such, each agency is left in a gray area of how to approach businesses like crypto exchanges and other Web3 platforms.

While the SEC memos are not law, they do indicate the direction in which the SEC will lean as they assess the cryptocurrency space and what they estimate future legislation may look like. It should be noted that neither the SEC nor other institutions are likely to draw a hard line against crypto companies prematurely and without legislation to fill the legal gaps. More than likely, KYC and other mainstream custody holders will comply with the new suggestions from the SAB.  It would save the need to retroactively defend their actions in the future, should the SEC enforce its stance.