Oct. 30, 2023
If decentralized cryptocurrencies like Ethereum or PulseChain were to be classified as securities by the SEC, it could significantly increase burdens for auditors, investment advisors, and investors under this proposed rule: Auditors would need to thoroughly understand cryptocurrency accounting. This cannot be effectively done until the regulating parameters on cryptocurrency are clearly defined. Auditors would also need to audit complex blockchain transactions which can be near impossible to do when unforeseeable factors come into play such as airdrops, free claims, and token burning. They would be required to reconcile crypto accounting differences with US GAAP standards. Again, how would this be done without defining clear crypto parameters? For an auditor to verify crypto asset balances is not always doable when the balance is ever-changing with yield-earning staking or even a decreasing balance with token burning, meaning the token gets eliminated from existence entirely. For an auditor to pinpoint valuations is a moving target in an ever-evolving, volatile market—especially if the balance is simultaneously increasing/decreasing due to staking or burning. Investment advisors would need to accurately track and account for crypto assets alongside traditional securities. The software to track crypto assets on the blockchain could not do so with 100% accuracy due to airdrops, forks, free claims, staking rewards, and token burning. Investment advisors must prove capability to fully safeguard crypto assets under their management. With thousands of hackers targeting crypto wallets and crypto asset managing services, it is extremely likely the company’s cybersecurity is at one point breached and the assets stolen. Some case examples are the cybersecurity breaches at Mt. Gox, Bitfinex, and KuCoin. ChainSEC compiled a list of hacked crypto exchanges, stating that “As of today, there are a total of 55 hacking events, with lost funds amounting to a total of approximately $2.4 billion at the time of these hacks, with the Mt.Gox hack of 2014 being the biggest casualty yet with $661,348,000 of stolen funds. The total amount does not include stolen user data and undisclosed amounts of stolen funds". Investors using advisors may have less direct control over crypto assets which must be custodied by the advisor. They would be forced to rely on the advisor's security policies rather than self-managing crypto wallets and keys. Overall, classifying decentralized cryptocurrencies as securities would impose significant new reporting, safeguarding, and auditing complexity that cannot fully be met in compliance. Rules like this SEC proposal would become much more burdensome and challenging to meet compliance.