SEC Division of Corporation Finance Issues Comments Regarding Recent Crypto Asset Market Disruptions

On December 8, 2022, the Securities and Exchange Commission (SEC) Division of Corporation Finance (the Division) released sample comments covering disclosure topics relating to crypto asset market exposure. The Division’s comments were issued in light of "[r]ecent bankruptcies and financial distress among crypto asset market participants" including several high-profile firms.

Comments

The sample comments focus on exposure to third parties, liquidity and financing risks, and legal and regulatory risks in crypto asset markets. These sample comment letters apply generally to filings made under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, specifically in issuers’ descriptions of business, management discussions and analyses, and risk factors.

Description of Business

Companies should discuss the potential impact on their businesses of recent crypto firm bankruptcies, including whether material assets may be lost or otherwise misappropriated. The comments suggest that companies extend this analysis to other counterparties, customers or custodians if material to an understanding of their businesses. The comments also encourage disclosure of policies and procedures in place to safeguard customers’ crypto assets and commingling of assets.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The sample comments support disclosure of any excessive redemptions or withdrawals, or suspension of redemptions and withdrawals, of crypto assets and potential effects on the company’s financial condition and liquidity. Companies should also explain whether crypto assets the company has issued or holds serve as collateral for any loan, margin, rehypothecation, or other similar activity. Companies should also discuss “whether the current crypto asset market disruption has impacted the value of the underlying collateral” whether or not the company is a party to the respective secured transaction.

Risk Factors

Finally, the release invites companies to describe material risks of redemptions and withdrawals of crypto assets as well as identify material concentrations of risk and quantify material exposures. The Division’s comments highlight risks and exposures related to reputational harm, unauthorized customer access, regulatory developments, jurisdictional claims, and safeguarding. Companies are also reminded to discuss the effect of “disruptions in the crypto asset markets” on more conventional risks such as depreciation in stock price and loss of customer demand.

Implications

These comments were issued one day after Chair Gary Gensler defended the SEC’s regulation of crypto markets and are consistent with recent pushes for increased regulation of cryptocurrency generally. Firms carrying crypto assets will likely be subject to greater scrutiny and regulatory enforcement in the near future. The Division’s release also follows several bills bolstering cryptocurrency regulation introduced in Congress this year. Capital Markets Watch will continue to monitor developments in this market and provide updates as they become available.