The SEC requires crypto exchanges to expose their customers’ assets

This year, a crackdown on digital assets has been at the top of the US Securities and Exchange Commission’s (SEC) plan. This was made clear by the SEC chair Gery Gensler in January when he said:

“If the trading platforms don’t come into the regulated space, it’d be another year of the public being vulnerable.”

Since then, the SEC has used its agencies exclusively to obtain information and run investigations on crypto exchanges.

Yesterday, it took another step towards its goal. It obliged crypto trading companies to consider all assets they hold for their customers as their own capital, including them on their balance sheets. In addition to the fiat currencies, the nature and amount of crypto assets held for customers will also be disclosed in detail. 

The new rule will be effective as of June and apply to all publicly listed crypto trading companies. Currently, crypto trading companies record and disclose the digital assets they hold in custody on behalf of their customers separately. This system is also used by brokerages as well.

The new requirement will separate crypto exchanges from brokerages and significantly enlarge the exchanges’ balance sheets as of June. For example, while Coinbase listed $21.3 billion in assets and liabilities in last year’s balance sheet, it also said it had $278 billion in cryptocurrency and currency in customer custody. 

Why does the SEC want to know?

According to the announcement, the SEC is worried about the negative impact of technological, legal, and regulatory risks of cryptocurrencies on their operations. The announcement states:

“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.” 

Technological risks include the safeguarding of assets and third parties who may be affected by the high volatility of crypto assets. Legal risks refer to the lack of precedent on how crypto custody would be dealt with in court. 

On the other hand, regulatory risks are about having a few regulatory requirements for holding crypto. At the same time, the exchange companies may not comply with the new regulations that exist, which increases risks to investors. 

With the new rule, the SEC hopes to expose more data on crypto exchanges to help investors with their allocation decisions. The ruling says:

“The staff believes that the recognition, measurement, and disclosure guidance in this statement will enhance the information received by investors and other users of financial statements about these risks, thereby assisting them in making investment and other capital allocation decisions.”