SEC Tells Exchanges to Treat Customer Crypto Holdings as Liabilities

As part of their business, crypto-trading platforms custody, or hold, assets on behalf of their customers. Like publicly traded securities brokerages, they currently disclose the total value of those assets apart from their own balance sheets, which tally up their own assets and liabilities.

The new accounting guidelines instruct publicly traded crypto firms to record the digital tokens they custody for customers as assets and their obligation to the customers as liabilities.

SEC officials said the aim is to introduce consistency to the accounting methods used by such platforms. But the change could also cause the balance sheets of publicly traded crypto exchanges and other SEC-registered entities that custody cryptocurrencies to grow exponentially.

Coinbase, the largest publicly traded crypto exchange, says it held $278 billion of cryptocurrencies and currencies for its customers as of Dec. 31, 2021. But it reported only $21.3 billion of assets and liabilities on its balance sheet.

“We’re going to see a very expanded balance sheet on both the debit side and credit side for crypto exchange operators,” said Vivian Fang, associate accounting professor at the University of Minnesota.

The SEC’s new guidance for crypto-trading platforms contrasts with the approach used by brokerages such as Charles Schwab Co. Inc. Those firms are allowed to leave the value of client assets off their own balance sheets because of legal precedent that has established that, in the event of bankruptcy, the assets belong to the clients.

The law is less settled in the case of crypto, SEC officials say.

The crypto industry has grown rapidly in recent years thanks to a flood of Wall Street market participation and venture-firm funding. But despite the rising popularity of digital tokens, the market remains largely unregulated.

While the technology behind cryptocurrencies enables people to transact directly with each other using digital wallets, most investors access the market through centralized trading platforms like Coinbase, FTX or Kraken.

In such cases, those platforms hold customers’ bitcoins or other tokens in their own wallets.

“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,” SEC staff wrote in a bulletin released Thursday. “These risks can have a significant impact on the entity’s operations and financial condition.”

—Mark Maurer contributed to this article.

Write to Paul Kiernan at paul.kiernan@wsj.com