On March 31, 2022, the SEC staff issued SAB 121 to address “accounting for entities that have obligations to safeguard crypto-assets held for their platform users.”  SAB 121 has been added to Topic 5 in the SAB codification.

The SAB starts with this fact set to specify the circumstances in which the SAB would apply:

Entity A’s business includes operating a platform that allows its users to transact in crypto-assets.  Entity A also provides a service where it will safeguard the platform users’ crypto-assets, including maintaining the cryptographic key information necessary to access the crypto-assets. Entity A also maintains internal recordkeeping of the amount of crypto-assets held for the benefit of each platform user. Entity A secures these crypto-assets and protects them from loss or theft, and any failure to do so exposes Entity A to significant risks, including a risk of financial loss. The platform users have the right to request that Entity A transact in the crypto-asset on the user’s behalf (e.g., to sell the crypto-asset and provide the user with the fiat currency (cash) proceeds associated with the sale) or to transfer the crypto-asset to a digital wallet for which Entity A does not maintain the cryptographic key information. However, execution and settlement of transactions involving the platform users’ crypto-assets may depend on actions taken by Entity A.

As you can read in the SAB, given the risks that “Entity A” has taken on in its business, the staff believes that it should record a liability on its balance sheet for the fair value of the crypto-assets it holds for customers.  This liability would be measured at fair value at each period end.  A corresponding asset would also be recorded and carried at fair value.  In addition, the SAB enumerates disclosures the staff believes appropriate in these circumstances.

Companies should apply this guidance for interim and annual periods ending after June 15, 2022.

 As always, your thoughts and comments are welcome!