SEC: Current Rules Adequate for Blockchain, Cryptocurrency Use

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By Denise Lugo

Current securities laws, financial reporting requirements, and auditing are sufficiently robust to meet challenges arising from increased use of cryptocurrencies and blockchain ledger technology, the SEC chairman and the agency’s top accountant said Dec. 4.

“We don’t need a whole lot because we have pretty good long standing body of law on dealing with securities,” Securities and Exchange Commission Chairman Jay Clayton told the American Institute of CPA’s conference on SEC and Public Company Auditing Oversight Board developments about the need for potential SEC changes.

Existing practices and analysis provide good guidance for preparing financial statements for issuers of securities—whether those securities are in the form of coins or tokens or other forms of technology, Clayton said.

When Code Becomes a Security

Clayton told the conference that accountants need to do a better job of explaining when a piece of electronic code becomes a security.

“At one end of the spectrum you have Ether and Bitcoin being the most common examples. At the other end of the spectrum you have distributed ledger technology that reflects what we all say is equity security or debt security,” Clayton said.

“I’ve been very public about this,” Clayton said. “If that’s the spectrum, you get to being a security pretty darn quickly because what you’re doing when you issue that is you’re asking people for you to take and use in a commercial endeavor with the prospect of increasing the value of that piece of the distributed ledger.”

“I see very little difference between that and a piece of paper that says ‘stock’ and saying “I might be able to sell this for more in the future based on my efforts.” Clayton said.

SEC Chief Accountant Wesley Bricker told reporters the agency will continue to monitor the market very closely to understand any forthcoming challenge. “We always think about how guidance can change, we think there’s sufficient existing guidance to meet our existing responsibilities,” Bricker said.

The SEC comments address possible effects technology and commerce innovations might have on companies’ financial reporting obligations.

To report these effects, the innovations must be understood. A major issue is how management should prepare and how auditors should audit a company’s financial statement in accordance with respective accounting and auditing standards.

Blockchain and the cryptocurrencies it supports are a major technological evolution. Huge lobbying efforts are trying to heighten awareness, particularly within the capital markets arena. Some groups have asked the Financial Accounting Standards Board for a full suite of accounting rules for reporting cryptocurrencies. The groups have differences exist in how companies have accounted for them. Some view them as cash, others as intangible assets, inventory, or financial instruments.

Blockchain and coin technologies underscore the need to grasp the workings of new technologies, a SEC accountant told the conference. T“Don’t wait,” SEC deputy chief accountant Julie Erhardt said. “Take note of what is going on, assessing what might impact accounting and auditing, and try to proactively work on it.”

Part of that effort means going beyond the basics. Company management must venture beyond “what does it do” and “get under the hood” and understand what it is and why it works, Erhardt said “One end of the spectrum is straight forward and that the other end is application tokens—there’s no one size fits all answer,” she said.

Companies should also figure out how to apply the current accounting and auditing models to these new innovations. “It won’t be the first time you’re faced with new transaction and structure,” Erhardt said. “It’s important to remember it’s not revenge of technology—it may be complicated—but at the end of the day the humans prevail.”

To contact the reporter on this story: Denise Lugo in Washington at dlugo@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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