3.11 Digital Assets

On March 31, 2022, the SEC issued SAB 121, which provides the SEC staff’s view that it would be appropriate for an entity that has an obligation to safeguard crypto assets to record a liability and corresponding asset on its balance sheet at the fair value of the crypto assets. SAB 121 applies to entities that (1) safeguard crypto assets (either directly or by an agent acting on their behalf) and (2) file with the SEC under either U.S. GAAP or IFRS Accounting Standards (including entities undergoing an IPO). SAB 121 also applies to private companies whose financial statements are included in filings with the SEC under Regulation S-X, Rules 3-05 and 3-09. In remarks at the 2024 AICPA & CIMA Conference on Banks & Savings Institutions, SEC Chief Accountant Paul Munter discussed the SEC staff’s consideration of whether SAB 121 is applicable in specific fact patterns respectively involving (1) a bank holding company, (2) a broker-dealer, and (3) a company that uses distributed ledger technology to facilitate asset transfers.

In the evaluation of whether SAB 121 applies to a given activity, it is critical to understand (1) how an entity has marketed its products and services; (2) whether and, if so, how the entity is involved in transaction flow; (3) whether the customer may perceive that safeguarding responsibilities (direct or indirect) have been assumed; and (4) whether, in legal and regulatory terms, the entity’s role and exposure might be viewed as going beyond that of having a contractual relationship with the customer. However, the determination of whether there is a safeguarding obligation is based on an entity’s specific facts and circumstances. Although no single factor is conclusive, there are certain factors, in combination, that the SEC staff considers to be determinative.

Given the SEC staff’s recent statements on the applicability of SAB 121, we would expect the staff to focus on the scope of SAB 121. Since disclosures about cryptocurrency are relatively new, registrants may want to enhance such disclosures, especially those discussing risks to the business, investors, and customers.

For additional discussion of the accounting considerations and disclosure requirements related to SAB 121, see Deloitte’s April 6, 2022 (updated July 28, 2022), Financial Reporting Alert.

In December 2023, the FASB issued ASU 2023-08 which provides guidance on the accounting for crypto assets (codified as ASC 350-60). Although the ASU’s amendments will not be effective for calendar-year-end entities until January 2025, early adoption is permitted for periods for which financial statements have not yet been issued (or made available for issuance).

Early adopters may encounter certain implementation questions when addressing the ASU’s requirements related to the types of assets that are within its scope, how to apply the fair value guidance to crypto assets, how to determine significant holdings for disclosure purposes, and other accounting and disclosure issues. For various FAQs about implementation of the ASU, see Deloitte’s April 2, 2024 (updated July 17, 2024), Heads Up.

SEC rules and staff interpretations require registrants to provide both annual and interim disclosures in the first interim period after the adoption of a new accounting standard and in each subsequent quarter within the year of adoption. Further, under Regulation S-K, Item 302(a), if an entity reports a material retrospective change (or changes) “for any of the quarters within the two most recent fiscal years,” the entity must disclose (1) an explanation for the material change(s) and (2) summarized financial information reflecting such change(s) for the affected quarterly periods, including the fourth quarter.

The SEC remains focused on registrants’ disclosures about the risks associated with digital assets, including, but not limited to, price volatility, exposure to counterparties, and business risks specific to the crypto industry. Registrants should provide investors with tailored, comprehensive, and transparent risk disclosures. See Section 3.3 for more information.

We understand that the SEC may become more focused on topics such as determining the principal market and applying the fair value measurement approach. For more traditional markets (e.g., those for equities and commodities), market characteristics such as pricing, regulatory oversight, and the general availability and reliability of information may be fairly consistent, thus permitting a market participant to make an informed determination about the total overall transaction volume and about which one of those venues is the principal or most advantageous market. However, such consistency may not exist for crypto asset markets because of their continuing rapid evolution. Further, the facts and circumstances relevant to the identification of the principal or most advantageous market for crypto assets may change over time and may differ from asset to asset as well as from entity to entity depending on the activities in which the entity engages. As a result of inconsistencies in the available information about market characteristics as well as differences in entities’ processes for identifying a principal market, an entity’s principal markets for various assets it holds may differ depending on where the entity trades. See Section 2.7 for more information about fair value.