The Securities and Exchange Commission has issued new cryptocurrency guidance to cryptocurrency exchanges which will need to report the digital tokens they hold for customers on their balance sheets as assets or liabilities. Technically, they are to treat the tokens held as assets to the company and their obligation to the clients as liabilities, according to press reports. The result is that most exchanges will have substantially expanded balance sheets. Coinbase for example held $278 Billion in cryptocurrencies for its customers as of Dec 31, 2021. Like publicly traded securities brokers, the exchanges presently disclose the value of those assets separate and apart from their own balance sheets, and as such, they are not treated as assets or liabilities. The apparent reason for this significant change relates to the unique risks and uncertainties in cryptocurrency which are not present in ordinary securities brokerages. The new recommendation reflects the agency’s concern regarding those risks and others in the cryptocurrency field. Generally, under the agreements with crypto exchanges, when funds are held for the clients those funds are used by the exchanges which frequently take title to the funds. Like banks, they may lend the money to other institutions, and yet very few are covered by federal insurance protections that banks have, and given the significant fluctuations in the value of cryptocurrencies, this is a substantially higher risk value than placing funds in a bank. In addition, the agreements of the exchanges do not detail how those funds are being used and with whom those transactions are engaged.
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