Coinbase, Robinhood Among Few Tallying Crypto Risks in Filings

Coinbase Global Inc., Robinhood Markets Inc., and Bakkt Holdings Inc. are among a small group of companies whose balance sheets are laden with billions of dollars worth of their customers’ crypto assets.

Roughly a dozen publicly traded companies have reported the market value of those customer holdings as a liability on the balance sheet for the past two years, applying controversial accounting guidance from the Securities and Exchange Commission. The disclosures broadcast to investors significant risks stemming from the volatile asset class, including potential hits to profits should those holdings be hacked or stolen.

But a review of US corporate filings issued over the past year shows that such reporting sets them apart from the pack.

Most other exchanges, investment managers, or payment services either don’t offer to store customers’ crypto holdings or have no material liabilities to report under the SEC’s crypto accounting guidance. And even banks eager to provide those same crypto custodian services now have a pathway to avoid inflated balance sheets under newer SEC guidelines.

“It’s sort of a brave new world,” said Eric Hirst, an accounting professor at the University of Texas at Austin. “There may be different business models that are emerging that really should have nothing on the balance sheet, or everything on the balance sheet.”

Customer digital holdings represented 94% of the assets that crypto exchange Coinbase reports and almost half of trading and investing platform Robinhood’s balance sheet at the end of the second quarter. Bakkt, a digital asset marketplace, similarly reported customer holdings totaling 78% of its assets during the first quarter.

The value of those customer liabilities could appear to pad the companies’ obligations compared to competitors that don’t have liabilities to report under the SEC’s guidance, known as Staff Accounting Bulletin 121.

The increasingly varied mix of information available to investors about custody business lines reflects the nascent crypto industry’s evolution as regulators begin to address how existing requirements apply to the nascent asset class.

Banks and crypto companies criticized the commission’s 2022 bulletin for failing to seek input from the industry or other regulators and keeping legacy asset managers on the sidelines. The SEC has stood by its guidance despite a rebuke from Congress, which unsuccessfully tried to rescind the accounting bulletin.

A Muddled Picture

Commission guidance requires companies to book a liability on the balance sheet reflecting the market value of any digital assets that they offer to store for customers.

But disclosures under the SEC’s accounting bulletin so far have varied among companies in depth and detail, creating more work for investors to understand a company’s financial health as they track the growth of those custody services and the scale of risks compared to competitors.

Details about customer-held crypto assets are scattered across financial reports filed with the commission. Sometimes the figures are tucked into larger line items on the balance sheet, potentially obscuring their impact or introducing volatility to a particular line on the balance sheet as the value of those assets dip and soar.

The values of Coinbase and Robinhood customer assets are easy to spot as they dominate their balance sheets. The companies even tout them on the front page of their investor relations websites.

Investors in online payments platform Paypal Holdings Inc. however have to dig to find such details deep in the footnotes to the financial statements.

BNY Mellon Corp. discloses only that liabilities and revenues related to the bank’s crypto custody business are too small to report. Still others say that the accounting guidance had no material impact on their financial statements.

Coinbase called the SEC’s bulletin “a guideline that the Government Accountability Office and the majority of Congress has indicated shouldn’t exist.”

The exchange, in its SEC filings, details a laundry list of risks related to its custodial service including reputational harm, litigation, regulatory enforcement, even lapses in its insurance coverage.

Robinhood, PayPal, and Bakkt did not respond to requests for comment.

The accounting highlights how companies manage those threats and how investors respond, said David Zion, founder of Zion Research Group, which specializes in accounting and tax research for investors.

“It could change investor behavior, which can have an impact on stock prices,” Zion said. “It can have an impact on the company, on the underlying economics of the business if the company were to change behavior.”

Corporate managers typically prefer to keep assets off their balance sheet to reduce the appearance of obligations and present themselves as a safer investment.

Past accounting changes that brought retiree obligations onto balance sheets effectively curbed the benefits that companies offered. Adding long-term financed leases to balance sheets was expected to shift corporate leasing strategies.

Similarly, companies could write contracts with their digital asset customers to ensure they have no safeguarding liability to report, Hirst said.

Evolving Ecosystem

The lack of consistency among companies reflects in part the fast-evolving compliance stance of an industry that once shunned regulations before the implosion of a string of crypto companies from FTX to Voyager to Celsius.

The SEC bulletin helped to legitimize crypto while serving as a test balloon to gauge which companies were willing to comply with the accounting, said Sadie Raney, CEO of Strix Leviathan, a digital asset management firm.

“Anytime regulators are willing to say: ‘OK let’s talk about digital assets and how we can fit them into our regulatory structure.’ That to me is absolutely a positive,” Raney said.

Starting last fall, SEC staff began counseling banks and brokerages, which risk triggering regulatory capital requirements with bigger balance sheets, that they could keep crypto customer assets off corporate balance sheets if they meet certain conditions. But that hasn’t satisfied detractors.

Coinbase said that relief would provide no advantage to the exchange, adding that it welcomes the chance to compete with banks but on a level playing field without “unequal and unmerited regulatory treatment,” the company said in a statement.

The bulletin effectively limited competition by boxing out banks from offering to safeguard crypto assets as a service, leaving just a few companies available to store assets invested in spot Bitcoin trading products, said Jeff Rundlet, head of accounting strategy for Cryptio, which links digital asset records to tax and accounting systems.

Coinbase stores assets for customers that have invested in the majority of those trading products, what Rundlet called “extreme concentration risk.”

Hirst, the accounting professor, sees the logic in the SEC’s treatment of crypto assets as it exposes what could be significant risks for companies, instead of hiding them from investors off-balance sheet.

“We don’t have rules for everything so we have to look to our concepts and our first principles,” Hirst said of US accounting standards. “Who should have it on their balance sheet? Who is taking the risk? Who is not taking the risk?”