In the past several years, many publicly-listed United States companies have invested in digital assets and some are considered the biggest companies in the space. This year, a downturn in fortunes and the collapse of dozens of giants in the industry have tainted the industry and led to hundreds of billions of dollars in losses. Now, the U.S. Securities and Exchange Commission (SEC) wants to know which listed companies were affected and to what extent.
In a recent guidance letter to U.S. companies, the watchdog asked the listed firms to “evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the potential impact on investors.”
The new requirements come following the collapse of FTX, a digital asset empire with deep ties to some major listed and regulated entities. Sam Bankman-Fried had duped many into believing his was the best-regulated exchange, attracting institutional capital as both users of its platform and investors in his company.
The SEC is one of many regulators on high alert following FTX’s collapse and is keen to ensure that it’s not caught off-guard again if any other digital asset company implodes.
Through its Division of Enforcement, the agency says that companies have a disclosure obligation “about the material impacts of crypto asset market developments, which may include a company’s exposure to counterparties and other market participants; risks related to a company’s liquidity and ability to obtain financing; and risks related to legal proceedings, investigations, or regulatory impacts in the crypto asset markets.”
One of the requirements will be for companies to disclose relations with companies that have experienced excessive redemptions or suspended withdrawals. This would include dozens of lending platforms that, in the aftermath of LUNA and now FTX collapse, have seen a ‘bank run’ as customers scramble to withdraw their funds.
The agency further demanded that public companies disclose how they safeguard their customers’ digital assets, if any. This includes procedures in place to prevent self-dealing and other conflicts of interest.
This requirement will affect companies that have digital assets on their balance sheet. They include major listed digital asset exchanges and miners, from Coinbase (NASDAQ: COIN) and Hut 8 (NASDAQ: HUT) to Marathon Digital Holdings (NASDAQ: MARA) and Hive Blockchain (NASDAQ: HIVE). It will also include companies that have bought BTC recently, led by Microstrategy (NASDAQ: MSTR), Jack Dorsey’s Block (NASDAQ: SQ), and Tesla (NASDAQ: TSLA), although the electric vehicle manufacturer dumped most of its BTC earlier this year.
The new disclosure requirements come months after the SEC joined hands with the Commodity Futures Trading Commission (CFTC) to require hedge funds to report their digital asset exposure. The two agencies voted to amend Form P.F. to require more disclosure from hedge funds.
Gary Gensler: ‘We’re suited up to regulate digital assets’
Even as the SEC published its new guidelines, the agency has come under scrutiny for failing to prevent many digital asset disasters this year. Being the de facto watchdog in the sector, the SEC has borne the brunt of the blame for lax regulations that have failed to stop players like Sam Bankman-Fried and Alex Mashinsky from ‘playing monopoly’ with their users’ funds.
Chairman Gary Gensler recently defended the agency, pointing out that it has played its part in curbing crime and fraud in the sector.
Speaking to Yahoo Finance, Gensler stated, “We’re already suited up,” referencing Senator Elizabeth Warren’s (D-Mass) comments last month that the agency needs to suit up and regulate the sector.
Gensler further called on digital asset companies, which he likened to casinos, “to come into compliance with our time-tested laws.”
“We brought actions against crypto lending platforms, including BlockFi, and we will continue to be a vigorous securities regulator, but I really do suggest to these intermediaries, these storefronts, these casinos, if you wish, to come into compliance, work with the SEC to get into compliance, disaggregate these businesses,” he stated.
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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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