09/09/2024 | Press release | Distributed by Public on 09/09/2024 14:34
Introduction[1]
Thank you to the AICPA for inviting me to speak with you today. Let me begin by saying that I am here in my official capacity as the Chief Accountant of the U.S. Securities and Exchange Commission and the views I express here are my own and do not necessarily reflect those of the Commission, the Commissioners or other members of the staff.
As many of you may know, in March 2022, the staff of the Division of Corporation Finance and the Office of the Chief Accountant published Staff Accounting Bulletin No. 121 ("SAB 121")[2] to communicate views of the staff regarding the accounting by entities that have obligations to safeguard crypto-assets held for their platform users. The views expressed in SAB 121 were the direct result of consultations from entities seeking the staff's views on their accounting for certain crypto-asset safeguarding arrangements. The staff views communicated in SAB 121 remain unchanged-the staff believes that an entity with safeguarding arrangements that align with the fact pattern described in SAB 121 should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for others, along with a corresponding asset that is separate and distinct from the crypto-assets held for others.
Since the issuance of SAB 121, entities have requested the views of the staff in the Office of the Chief Accountant on the accounting for a variety of other fact patterns involving the use of distributed ledger technology and the safeguarding of crypto-assets that present varying degrees of legal, technological, and regulatory risks and uncertainties. In certain cases, entities have demonstrated how the specific risks and uncertainties involved in their fact patterns are different than those contemplated in SAB 121. Today, I would like to highlight certain observations from recent accounting consultations with entities where the staff in the Office of the Chief Accountant has not objected to an entity's conclusion that its arrangement was not within the scope of SAB 121 and that it should not recognize a liability for an obligation to safeguard crypto-assets held for others. In each of the accounting consultations I'll describe, the staff's conclusion was based on the specific facts, circumstances, representations, and warranties by the entity and its outside advisers, including in legal opinions, with respect to the entity's arrangement. Those conclusions would not necessarily be the same for different fact patterns.
Bank Holding Companies
Starting with a recent accounting consultation from an entity that is a bank holding company, the entity requested the staff's views on the accounting for its obligations within a regulated bank subsidiary (the "Bank") to safeguard crypto-assets for institutional customers only. In this specific fact pattern, the Bank held the cryptographic private key information that provides access to the crypto-assets being safeguarded by the Bank. While no individual factor was determinative, the entity provided the following facts and representations, among others, to support its conclusion that it sufficiently mitigated the unique risks and uncertainties present in its arrangements to safeguard crypto-assets, such that it should not recognize a liability on its balance sheet for an obligation to safeguard crypto-assets:
Based on the specific facts and representations presented by the entity regarding the crypto-asset safeguarding activities to be performed by the Bank, the staff did not object to the entity's conclusion that the arrangement was not within the scope of SAB 121 and that it should not recognize on its balance sheet a safeguarding liability measured based on the fair value of the crypto-assets the Bank is responsible for holding for its institutional customers. The entity noted that it would provide disclosure in its SEC filings about the extent of crypto-assets safeguarded and the relevant risk factors and impacts to risk management, as well as the significant judgments made in reaching its accounting policy conclusion.
Introducing Brokers and Dealers
The staff has also addressed a number of fact patterns where a registered broker-dealer is involved in facilitating the purchase, sale, and holding of crypto-assets by others (i.e., an introducing broker-dealer). These registered introducing broker-dealers have generally entered into an arrangement with a third party (which may be an unaffiliated third party or an affiliate of the introducing broker-dealer) through which the third party will provide crypto-asset trade execution and safeguarding services for customers of the introducing broker-dealers. The introducing broker-dealer, or a related party of the introducing broker-dealer, typically provides an interface that allows the introducing broker-dealer's customers to submit crypto-asset transaction orders and then transmits those transaction orders to the third party for fulfillment.
In these entity-specific consultations, and in similar fact patterns where an introducing broker-dealer is involved in arrangements through which customers invest in or hold crypto-assets, the staff has communicated that it would not object to a conclusion that, for the introducing broker-dealer, the arrangement is not within the scope of SAB 121 and the introducing broker-dealer should not recognize a liability on its balance sheet to reflect an obligation to safeguard crypto-assets related to the crypto-assets held for its customers at the third party given the existence of the following facts and circumstances:
Other Uses of Distributed Ledger Technology
In addition to the fact patterns I've just described regarding an entity's involvement in the safeguarding of crypto-assets for others, the staff of the Office of the Chief Accountant has also received accounting consultations from entities where distributed ledger or blockchain technology is used to facilitate certain types of transactions. For example, the staff has seen fact patterns where distributed ledger technology is utilized by entities to track holdings and transfers of traditional financial assets. In some fact patterns, these traditional financial assets have been issued in "tokenized" form representing a bond or fractional share of a bond on a distributed ledger.
While the staff's determination is based upon specific facts and circumstances, in many cases the staff has not objected to an entity's conclusion that its arrangement was not within the scope of SAB 121 and that it should not recognize a liability on its balance sheet to reflect an obligation to safeguard crypto-assets for others. In this regard, the staff has seen fact patterns where the design of the distributed ledger technology system allows the entity to control recording issuances and/or transfers of assets, including the ability for the entity to correct errors, if needed. Additionally, the staff has seen fact patterns where entities were able to attribute legal ownership of the traditional assets to their specific customers, which can also involve interoperability of the distributed ledger with traditional recordkeeping systems that are maintained by the entity (for example, reconciliation with customer databases and non-distributed ledger systems for customers to submit instructions to purchase, sell, or transfer their assets).
Conclusion
In summary, the staff's views in SAB 121 remain unchanged, and absent particular mitigating facts and circumstances, the staff believes an entity should record a liability on its balance sheet to reflect its obligation to safeguard crypto-assets held for others. I believe that such financial reporting provides relevant, timely information that investors need to assess the unique risks and uncertainties related to safeguarding crypto-assets for others. As I've highlighted today, the staff has recently addressed particular fact patterns related to crypto-assets and distributed ledger technology that were not contemplated by SAB 121. In those instances, given the specific facts and circumstances of different arrangements, the staff has not objected to entities' conclusions that the particular arrangement was not within the scope of SAB 121 and that they should not record a crypto-asset safeguarding liability on-balance sheet.
As always, we remain available for consultations[4] with any entity who requests the staff's views on their accounting conclusions, including those related to obligations to safeguard crypto-assets for others.
Thank you for your time today.
[1] This statement is provided in the author's official capacity as the Commission's Chief Accountant but does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff. It is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This statement, like all staff statements, has no legal force or effect. It does not alter or amend applicable law, and it creates no new or additional obligations for any person.
[2] Staff Accounting Bulletin No. 121, 17 CFR Part 211 (Mar. 31, 2022), available at https://www.sec.gov/oca/staff-accounting-bulletin-121. The statements in staff accounting bulletins are not rules or interpretations of the Commission, nor are they published as bearing the Commission's official approval. They represent staff interpretations and practices followed by the staff in the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws.
[3]See, e.g., Federal Deposit Insurance Corporation ("FDIC"), Financial Institution Letter, Notification of Engaging in Crypto-Related Activities; Federal Reserve Board, Supervision and Regulation Letter SR 22-6/CA 22-6, Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking Organizations; and Office of the Comptroller of the Currency, Interpretive Letter #1179, Chief Counsel's Interpretation Clarifying Authority of a Bank to Engage in Certain Cryptocurrency Activities.
[4] More information about how to initiate a dialogue with OCA, what to expect from the consultation process, and what information should be included in a consultation submission in order for OCA to most quickly address a company's or auditor's question is available on OCA's webpage.