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US Securities and Exchange Commission

Industry Groups Seek Bank Exemption from SEC Guidance on Crypto Platform Accounting

Bill Flook  Editor, Accounting and Compliance Alert

Bill Flook  Editor, Accounting and Compliance Alert

The Securities Industry and Financial Markets Association (SIFMA) and Bank Policy Institute (BPI) on May 19, 2022, said regulated banks should be exempt from provisions in a recent SEC staff accounting bulletin on the accounting treatment of crypto assets for platforms.

Or, the groups wrote in a letter to Sen. Cynthia Lummis, the commission should delay implementation of Staff Accounting Bulletin (SAB) No. 121 so Congress, regulators and the public can consider its implications.

“Given the lack of notice provided prior to public issuance and the failure to solicit public input prior to the issuance of SAB 121, and the short implementation timeline, various stakeholders are in the process of evaluating the impact of SAB 121,” SIFMA and BPI wrote to the Wyoming Republican. “Many possible policy and technical issues remain unclear and require thoughtful evaluation. However, the SEC’s process in issuing the accounting bulletin does not provide affected parties sufficient time to properly evaluate these new requirements or their potential implications.”

(SAB) No. 121, issued in late March, addresses entities with obligations to safeguard crypto assets held for platform users and the technological, legal, and regulatory risks associated with those arrangements. (See Investors Applaud SEC Stance on Accounting Treatment of Customers’ Cryptos as Commissioner Peirce Criticizes It in the April 11, 2022, edition of Accounting & Compliance Alert.)

Using a hypothetical crypto trading platform referred to as Entity A, staff concluded that as long as that entity is “responsible for safeguarding the crypto-assets held for its platform users, including maintaining the cryptographic key information necessary to access the crypto-assets, the staff believes that Entity A should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users.”

“As Entity A’s loss exposure is based on the significant risks associated with safeguarding the crypto-assets held for its platform users, the staff believes it would be appropriate to measure this safeguarding liability at initial recognition and each reporting date at the fair value of the crypto-assets that Entity A is responsible for holding for its platform users,” staff wrote in the bulletin. “The staff also believes it would be appropriate for Entity A to recognize an asset at the same time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of the crypto-assets held for its platform users.”

The industry groups wrote that stakeholder concern appears to be coalescing around the negative impact “on the traditional custody of securities, which has many benefits to customers with regard to the protection of their assets.”

“Additionally, among other things, SAB 121 will also likely limit customer choice and have disparate impact on different types of potential participants,” the industry groups wrote. “These concerns should be more thoughtfully considered through a more thorough process.”

Lummis, during a May 19 Senate Banking hearing on two SEC nominees, said she is concerned SAB No. 121 “actually weakens investor protections because in the event of insolvency customer assets are safer from creditors being held off-balance sheet and further segregated from the company’s assets.”

She pressed Republican SEC nominee Mark Uyeda for his thoughts on SAB No. 121. Uyeda replied that he is familiar with the accounting bulletin at a high level and has “not had time to become well versed in the details or to have discussions with the SEC staff about it.”

“I’ll note it was a staff position, it was not approved by a vote of the members of the commission, there has been a tremendous amount of concern raised that I’ve seen in the past week alone about it, and so if confirmed, it is something that I want to look much more into and have a discussion with the staff,” he said.

“One of the other concerns I think is we have a process for whenever there is a new rule of general applicability, or you attach new conditions or requirements on existing rules to approve those through the notice and comment process under the Administrative Procedure Act,” he said. “When you have something that is effectively a rule that calls into question whether it should go through that process, and…also raises questions about the ability of this committee to engage in oversight under the Congressional Review Act of any rule. So if confirmed, I would want to talk with the staff.” He adding that he also wants to talk to federal and state banking regulators about how the guidance interplays with their regulatory regimes.

 

This article originally appeared in the May 23, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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