Dive Brief:

• The Securities and Exchange Commission (SEC) issued guidance saying that companies should disclose the risks to investors from cryptocurrencies held on behalf of customers and account for the assets as liabilities.
• The SEC noted an increase in the number of companies that enable customers to transact in crypto-assets, while maintaining the cryptographic key information needed to hold and safeguard the assets. The Staff Accounting Bulletin, released publicly March 31, took effect Monday.
• Such activity poses "unique risks and uncertainties" in technology, law and regulation that "can have a significant impact on the entity’s operations and financial condition" and should be included as a liability on a company’s balance sheet, the SEC said. The guidance from the SEC’s chief accountant and Corporation Finance Division are "staff interpretations and practices" rather than rules or interpretations of the Commission.

Dive Insight:

President Joe Biden signed an executive order last month aimed at "ensuring responsible development of digital assets."

Non-state digital assets soared to a total market capitalization of $3 trillion in November from $14 billion in 2016, while approximately 40 million U.S. citizens have invested in, traded or used cryptocurrencies, the White House said, citing unidentified surveys.

"Dramatic growth" in markets for digital assets has "profound implications for the protection of consumers, investors and businesses, including data privacy and security; financial stability and systemic risk; crime; national security; the ability to exercise human rights; financial inclusion and equity; and energy demand and climate change," the White House said.

Company financial statements should include notes disclosing the type and amount of crypto-assets that a company holds for its customers, and vulnerabilities stemming from "any concentration in such activities," the SEC said.

A company should disclose the potential harm to its financial condition, cash flows and operating results from the loss, theft or unavailability of cryptographic key information, as well as its efforts to curb risk through insurance or other measures, according to the SEC.

A company should also "present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users," the agency said. The assets should be accounted for at fair value.

In a recent high-profile attack, hackers last month stole more than $600 million in cryptocurrency from Axie Infinity, a video game. "We are working directly with various government agencies to ensure the criminals get brought to justice," developers at Sky Mavis, which operates Axie Infinity, said in a statement.

More broadly, cybercriminals are increasingly turning to crypto as the preferred form of currency as it allows instantaneous, liquid and borderless movement of funds used for extortion, the purchase of hacking tools and other schemes.

Biden’s March 9 order directed the departments of the Treasury, Homeland Security, Justice and several other agencies in a "whole-of-government" effort to develop recommendations for fighting theft, fraud and other crimes involving digital assets.

Among many initiatives aimed at identifying the risks and benefits of digital assets, the directive mandates research and development into a U.S. central bank digital currency.

The SEC disclosure and accounting guidance on digital assets exemplifies the agency’s "scattershot and inefficient approach to crypto," Commissioner Hester Peirce said in a statement.

The guidance "as a staff statement is not enforceable, but much of the language in the document reads as if it is," Peirce said.

Also, "if we are trying to encourage companies to enter our public markets, we ought to embrace a more deliberate approach to changing rules — one that involves consulting with affected parties," she said.