[Federal Register Volume 87, Number 69 (Monday, April 11, 2022)]
[Rules and Regulations]
[Pages 21015-21018]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-07196]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 121]


Staff Accounting Bulletin No. 121

AGENCY: Securities and Exchange Commission.

ACTION: Publication of staff accounting bulletin.

-----------------------------------------------------------------------

SUMMARY: This staff accounting bulletin expresses the views of the 
staff regarding the accounting for obligations to safeguard crypto-
assets an entity holds for platform users.

DATES: Effective April 11, 2022.

FOR FURTHER INFORMATION CONTACT: Karmen Ward, Professional Accounting 
Fellow, Office of the Chief Accountant at (202) 551-5300, or Todd E. 
Hardiman, Associate Chief Accountant, Division of Corporation Finance 
at (202) 551-3400, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

[[Page 21016]]


SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins 
are not rules or interpretations of the Commission, nor are they 
published as bearing the Commission's official approval. They represent 
staff interpretations and practices followed by the staff in the 
Division of Corporation Finance and the Office of the Chief Accountant 
in administering the disclosure requirements of the federal securities 
laws.

    Dated: March 31, 2022.
J. Matthew DeLesDernier,
Assistant Secretary.

    Accordingly, Part 211 of Title 17 of the Code of Federal 
Regulations is amended as follows:

PART 211--INTERPRETATIONS RELATING TO FINANCIAL REPORTING MATTERS

0
1. The authority citation for 17 CFR 211 continues to read as follows:

    Authority: 15 U.S.C. 77g, 15 U.S.C. 77s(a), 15 U.S.C. 77aa(25) 
and (26), 15 U.S.C. 78c(b), 15 U.S.C. 78l(b), 15 U.S.C. 78m(b), 15 
U.S.C. 80a-8, 15 U.S.C. 80a-29(e), 15 U.S.C. 80a-30, and 15 U.S.C. 
80a-37(a).


0
2. Amend the table in subpart B by adding an entry for Staff Accounting 
Bulletin No. 121 at the end of the table to read as follows:

Subpart B--Staff Accounting Bulletins

----------------------------------------------------------------------------------------------------------------
                Subject                 Release No.                Date                 Fed. Reg. vol. and page
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
Publication of Staff Accounting              SAB121  April 11, 2022..................  [INSERT FEDERAL REGISTER
 Bulletin No. 121.                                                                      CITATION].
----------------------------------------------------------------------------------------------------------------


    Note: The text of Staff Accounting Bulletin No. 121 will not 
appear in the Code of Federal Regulations.

Staff Accounting Bulletin No. 121

    The staff hereby adds Section FF to Topic 5 of the Staff Accounting 
Bulletin Series. This staff accounting bulletin (``SAB'') adds 
interpretive guidance for entities to consider when they have 
obligations to safeguard crypto-assets held for their platform users. 
This SAB is applicable to entities that file reports pursuant to 
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 
(``Exchange Act'') and entities that have submitted or filed a 
registration statement under the Securities Act of 1933 (``Securities 
Act'') or the Exchange Act that is not yet effective. The SAB is also 
applicable to entities submitting or filing an offering statement or 
post-qualification amendment thereto under Regulation A, entities 
subject to the periodic and the current reporting requirements of 
Regulation A, and private operating companies whose financial 
statements are included in filings with the SEC in connection with a 
business combination involving a shell company, including a special 
purpose acquisition company. Accordingly, the staff hereby amends the 
Staff Accounting Bulletin Series as follows:
* * * * *

Topic 5: Miscellaneous Accounting

* * * * *
    The interpretations in this SAB express views of the staff 
regarding the accounting for entities that have obligations to 
safeguard crypto-assets held for their platform users.\1\ In recent 
years, the staff has observed an increase in the number of entities 
that provide platform users with the ability to transact in crypto-
assets. In connection with these services, these entities and/or their 
agents may safeguard the platform user's crypto-asset(s) and also 
maintain the cryptographic key information necessary to access the 
crypto-asset. 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. Specifically:
---------------------------------------------------------------------------

    \1\ This SAB expresses no view with respect to any other 
questions that these activities may raise for any of the entities 
involved, including the applicability of the registration or other 
provisions of the federal securities laws or any other federal, 
state, or foreign laws.
---------------------------------------------------------------------------

    <bullet> Technological risks--there are risks with respect to both 
safeguarding of assets and rapidly-changing crypto-assets in the market 
that are not present with other arrangements to safeguard assets for 
third parties;
    <bullet> Legal risks--due to the unique characteristics of the 
assets and the lack of legal precedent, there are significant legal 
questions surrounding how such arrangements would be treated in a court 
proceeding arising from an adverse event (e.g., fraud, loss, theft, or 
bankruptcy); and
    <bullet> Regulatory risks--as compared to many common arrangements 
to safeguard assets for third parties, there are significantly fewer 
regulatory requirements for holding crypto-assets for platform users or 
entities may not be complying with regulatory requirements that do 
apply, which results in increased risks to investors in these entities.
    These risks can have a significant impact on the entity's 
operations and financial condition. The staff believes that the 
recognition, measurement, and disclosure guidance in this SAB 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.

FF. Accounting for Obligations To Safeguard Crypto-Assets an Entity 
Holds for Its Platform Users

    Facts: Entity A's \2\ business includes operating a platform that 
allows its users to transact in crypto-assets.\3\ Entity A also 
provides a service where it will safeguard the platform users' crypto-
assets,\4\ including maintaining the cryptographic key information \5\ 
necessary to access the crypto-assets. Entity A also maintains internal 
recordkeeping of the amount of crypto-assets held for the benefit of 
each platform user. Entity A secures these crypto-assets and protects 
them from loss or theft, and any failure to do so exposes Entity A to 
significant risks, including a risk of financial loss. The platform 
users have the right to request that Entity A transact in the crypto-
asset on the user's behalf (e.g., to sell the crypto-asset and provide 
the user with the fiat currency (cash) proceeds associated with the 
sale) or to transfer the crypto-asset to a digital wallet for which 
Entity A does not maintain the cryptographic key information.

[[Page 21017]]

However, execution and settlement of transactions involving the 
platform users' crypto-assets may depend on actions taken by Entity A.
---------------------------------------------------------------------------

    \2\ References throughout this SAB to ``Entity A'' are inclusive 
of the entity as well as any agent acting on its behalf in 
safeguarding the platform users' crypto-assets.
    \3\ For purposes of this SAB, the term ``crypto-asset'' refers 
to a digital asset that is issued and/or transferred using 
distributed ledger or blockchain technology using cryptographic 
techniques.
    \4\ The service may be provided by Entity A or by an agent 
acting on Entity A's behalf.
    \5\ The guidance in this SAB is applicable regardless of whether 
the cryptographic key remains in the name of the platform user or is 
in the name of the Entity.
---------------------------------------------------------------------------

    Question 1: How should Entity A account for its obligations to 
safeguard crypto-assets held for platform users?
    Interpretive Response: The ability of Entity A's platform users to 
obtain future benefits from crypto-assets in digital wallets where 
Entity A holds the cryptographic key information is dependent on the 
actions of Entity A to safeguard the assets. Those actions include 
securing the crypto-assets and the associated cryptographic key 
information and protecting them from loss, theft, or other misuse. The 
technological mechanisms supporting how crypto-assets are issued, held, 
or transferred, as well as legal uncertainties regarding holding 
crypto-assets for others, create significant increased risks to Entity 
A, including an increased risk of financial loss.\6\ Accordingly, as 
long as Entity A is responsible for safeguarding the crypto-assets held 
for its platform users, including maintaining the cryptographic key 
information necessary to access the crypto-assets, the staff believes 
that Entity A should present a liability on its balance sheet to 
reflect its obligation to safeguard the crypto-assets held for its 
platform users.
---------------------------------------------------------------------------

    \6\ See generally Report of the Attorney General's Cyber Digital 
Task Force: Cryptocurrency Enforcement Framework (Oct. 2020), at 15-
16, available at https://www.justice.gov/ag/page/file/1326061/download.
---------------------------------------------------------------------------

    As Entity A's loss exposure is based on the significant risks 
associated with safeguarding the crypto-assets held for its platform 
users, the staff believes it would be appropriate to measure this 
safeguarding liability at initial recognition and each reporting date 
at the fair value \7\ of the crypto-assets that Entity A is responsible 
for holding for its platform users. The staff also believes it would be 
appropriate for Entity A to recognize an asset \8\ at the same time 
that it recognizes the safeguarding liability, measured at initial 
recognition and each reporting date at the fair value of the crypto-
assets held for its platform users.\9\
---------------------------------------------------------------------------

    \7\ For U.S. generally accepted accounting principles (``U.S. 
GAAP''), refer to glossary definition provided in Financial 
Accounting Standards Board (``FASB'') Accounting Standards 
Codification (``ASC'') Topic 820. For International Financial 
Reporting Standards (``IFRS''), refer to glossary definition 
provided in IFRS 13.
    \8\ The asset recognized is similar in nature to an 
indemnification asset as described in FASB ASC 805 and IFRS 3. The 
measurement of the asset is on the same basis as the crypto-asset 
safeguarding liability assumed by the entity. The asset recognized 
by the entity is separate and distinct from the crypto-asset itself 
that has been transferred to and then held for the platform user.
    \9\ Similar to the guidance in FASB ASC 805 and IFRS 3, Entity A 
would need to evaluate whether any potential loss events, such as 
theft, impact the measurement of the asset.
---------------------------------------------------------------------------

    Question 2: Assume the same facts as Question 1. What disclosures 
would the staff expect Entity A to provide regarding its safeguarding 
obligations for crypto-assets held for its platform users?
    Interpretive Response: In light of the significant risks and 
uncertainties associated with safeguarding crypto-assets, including the 
risks of loss associated with holding the cryptographic key information 
necessary to secure and transact in the crypto-asset, the staff 
believes the notes to the financial statements should include clear 
disclosure of the nature and amount of crypto-assets that Entity A is 
responsible for holding for its platform users, with separate 
disclosure for each significant crypto-asset, and the vulnerabilities 
Entity A has due to any concentration in such activities.\10\ In 
addition, because the crypto-asset safeguarding liabilities and the 
corresponding assets are measured at the fair value of the crypto-
assets held for its platform users, the entity would be required to 
include disclosures regarding fair value measurements.\11\ The 
accounting for the liabilities and corresponding assets should be 
described in the footnotes to the financial statements.\12\ In 
providing these disclosures, Entity A should consider disclosure about 
who (e.g., the company, its agent, or another third party) holds the 
cryptographic key information, maintains the internal recordkeeping of 
those assets, and is obligated to secure the assets and protect them 
from loss or theft.
---------------------------------------------------------------------------

    \10\ For U.S. GAAP, see FASB ASC 275-10-50. For IFRS, see IAS 1.
    \11\ For U.S. GAAP, see FASB ASC 820. For IFRS, see IFRS 13.
    \12\ For U.S. GAAP, see FASB ASC 235-10-50. For IFRS, see IAS 1.
---------------------------------------------------------------------------

    Disclosures regarding the significant risks and uncertainties 
associated with the entity holding crypto-assets for its platform users 
may also be required outside the financial statements under existing 
Commission rules, such as in the description of business, risk factors, 
or management's discussion and analysis of financial condition and 
results of operation.\13\ For example, to the extent it is material, 
Entity A may need to provide disclosure describing the types of loss or 
additional obligations that could occur, including customer or user 
discontinuation or reduction of use of services, litigation, 
reputational harm, and regulatory enforcement actions and additional 
restrictions. A discussion of the analysis of the legal ownership of 
the crypto-assets held for platform users, including whether they would 
be available to satisfy general creditor claims in the event of a 
bankruptcy should be considered. Further, Entity A may need to provide 
disclosure of the potential impact that the destruction, loss, theft, 
or compromise or unavailability of the cryptographic key information 
would have to the ongoing business, financial condition, operating 
results, and cash flows of the entity. As part of this disclosure, 
Entity A should also consider including, to the extent material, 
information about risk-mitigation steps the entity has put in place 
(e.g., insurance coverage directly related to the crypto-assets held 
for platform users).
---------------------------------------------------------------------------

    \13\ See, e.g., Item 101 of Regulation S-K; Item 105 of 
Regulation S-K; Item 303 of Regulation S-K.
---------------------------------------------------------------------------

    Question 3: How and when should Company A initially apply the 
guidance in this Topic in its financial statements?
    Interpretive Response: The staff would expect an entity that files 
reports pursuant to Section 13(a) or Section 15(d) of the Exchange Act, 
or an entity required to file periodic and current reports pursuant to 
Rule 257(b) of Regulation A, to apply the guidance in Topic 5.FF no 
later than its financial statements covering the first interim or 
annual period ending after June 15, 2022, with retrospective 
application as of the beginning of the fiscal year to which the interim 
or annual period relates.
    The staff expects all other entities, including but not limited to 
entities conducting an initial registration of securities under the 
Securities Act or Exchange Act, entities conducting an offering of 
securities under Regulation A, and private operating companies entering 
into a business combination transaction with a shell company, including 
a special purpose acquisition company, to apply the guidance in Topic 
5.FF beginning with their next submission or filing with the SEC (e.g., 
the initial or next amendment of the registration statement, proxy 
statement, or Form 1-A), with retrospective application, at a minimum, 
as of the beginning of the most recent annual period ending before June 
15, 2022, provided the filing also includes a subsequent interim period 
that also reflects application of this guidance.\14\ If

[[Page 21018]]

the filing does not include a subsequent interim period that also 
reflects application of this guidance, then the staff expects it to be 
applied retrospectively to the beginning of the two most recent annual 
periods ending before June 15, 2022.
---------------------------------------------------------------------------

    \14\ For example, a calendar year-end company that submits a 
registration statement in January 2023 including financial 
statements as of and for the fiscal year ending December 31, 2021 
and as of and for the nine months ended September 30, 2022 would 
apply the SAB to those periods.
---------------------------------------------------------------------------

    For all entities, in the financial statements that reflect the 
initial application of this guidance, the effect of the initial 
application should be reported in the carrying amounts of assets and 
liabilities as of the beginning of the annual period specified above. 
Entities should include clear disclosure of the effects of the initial 
application of this guidance.\15\
---------------------------------------------------------------------------

    \15\ For U.S. GAAP, see FASB ASC 250-10-50-1 through 50-3; for 
IFRS, see IAS 8. See also, e.g., Item 302 of Regulation S-K and 
PCAOB Auditing Standard 2820 (par. 8).

[FR Doc. 2022-07196 Filed 4-8-22; 8:45 am]
BILLING CODE P