SEC Says Crypto Exchanges Need to Treat User Funds As Their Own Liabilities

The U.S. Securities and Exchange Commission (SEC) says that moving forward, crypto exchange platforms must treat their users’ digital assets as their own liabilities.

In a new bulletin, the SEC says that crypto trading platforms guarding digital assets face unique risks not seen in traditional financial services.

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“In connection with these services, these entities and/or their agents may safeguard the platform user’s crypto asset(s) and also maintain the cryptographic key information necessary to access the crypto asset.

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.”

The agency says that given the unique uncertainties inherent in providing crypto services, firms should present liabilities on their balance sheet to reflect their users’ digital assets in their custody.

In its bulletin, the SEC refers to crypto platforms as “Entity A.”

“The ability of Entity A’s platform users to obtain future benefits from crypto-assets in digital wallets where Entity A holds the cryptographic key information is dependent on the actions of Entity A to safeguard the assets. Those actions include securing the crypto-assets and the associated cryptographic key information and protecting them from loss, theft, or other misuse.

The technological mechanisms supporting how crypto-assets are issued, held, or transferred, as well as legal uncertainties regarding holding crypto-assets for others, create significant increased risks to Entity A, including an increased risk of financial loss.

Accordingly, as long as Entity A 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.”

The SEC says that they expect crypto platforms to start disclosing the nature and amount of crypto assets held by their users in company accounts by June 15th.

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