In light of an increasing number of companies that give platform users the ability to transact in crypto assets and provide a service to safeguard such assets, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 121 (SAB 121) on March 31, 2022, in an effort to enhance the information received by investors and other users of financial statements about the risks associated with safeguarding crypto assets.
SAB 121 represents a significant change to companies that safeguard crypto assets. SAB 121 provides that a company that is responsible for safeguarding crypto assets held for its platform users should record a liability on its balance sheet for its obligation to do so, measured at fair value, and should record a corresponding asset, measured at fair value, at the same time as it records the liability. Currently, a company will generally not report the crypto assets of platform users on its balance sheet unless it has control over such assets. However, under SAB 121, the fair value of crypto assets will be recorded as a liability, along with a corresponding asset, even when a company has no control over such crypto assets.
The interpretative guidance defines a crypto asset as a digital asset that is issued and/or transferred using a distributed ledger or blockchain technology using cryptographic techniques and applies whether a company safeguards crypto assets for platform users directly or by an agent acting on its behalf.
Who does the guidance apply to?
The guidance applies to companies that file reports pursuant to the Securities Exchange Act of 1934 (Exchange Act) and companies that have submitted or filed a registration statement under the Securities Act of 1933 (Securities Act) or the Exchange Act that is not yet effective. It also applies to certain other companies, including private operating companies that are going public through a business combination transaction with a special purpose acquisition company (SPAC) and companies that are submitting or filing an offering statement under Regulation A.
When should companies initially apply the guidance?
The staff expects companies that are current SEC filers to comply with SAB 121 no later than the first interim or annual period ending after June 15, 2022, with retrospective application as of the beginning of the fiscal year to which the interim and annual period is related. The staff expects all other companies, including companies conducting an initial registration of securities under the Securities Act or Exchange Act, companies conducting an offering of securities under Regulation A, and private operating companies entering into a business combination transaction with a SPAC, to apply the guidance beginning with their next submission or filing with the SEC, with retrospective application, at a minimum, as of the beginning of the most recent annual period ending before June 15, 2022, provided the filing also includes a subsequent interim period that also reflects application of this guidance. If the filing does not include a subsequent interim period that also reflects application of this guidance, then the staff expects it to be applied retrospectively to the beginning of the two most recent annual periods ending before June 15, 2022.
What should your company be doing?
As a result of SAB 121, a company should review its current financial statement disclosures and revise as necessary to:
- Address the nature and amount of crypto assets the company is responsible for holding for its platform users, with separate disclosure for each significant crypto asset.
- Address any vulnerabilities due to any concentration of such activities (see ASC 275-10-50).
- Include fair value disclosures related to the crypto asset safeguarding liabilities and corresponding assets (see ASC 820).
- Include a description of the accounting for the liabilities and corresponding assets (see ASC 235-10-50).
- Consider disclosure about who (e.g., the company, its agent, or another third party) holds the cryptographical key information, maintains the internal recordkeeping of those assets, and is obligated to secure those assets and protect them from theft or loss.
- Include a description of recently pronounced or recently adopted accounting standards, as applicable, related to SAB 121.
As a result of SAB 121, a company should also review its disclosure outside the financial statements regarding the significant risks and uncertainties associated with the company holding crypto assets for its platform users, including in the risk factors, description of business, and management’s discussion and analysis of financial condition and results of operation.
Among other things, a company may need to:
- Describe, to the extent material, the types of loss or additional obligations that could occur, including customer or user discontinuation or reduction of use of services, litigation, reputational harm, and regulatory enforcement actions and additional restrictions.
- Include an analysis of the legal ownership of the crypto assets held for platform users, including whether they would be available to satisfy general creditor claims in the event of a bankruptcy.
- Disclose the potential impact that the destruction, loss, theft, or compromise or unavailability of the cryptographic key information would have to the ongoing business, financial condition, operating results and cash flows of the company.
- Address, to the extent material, risk-mitigation steps the company has put in place (e.g., insurance coverage directly related to the crypto assets held for platform users).