The United States Securities and Exchange Commission (SEC) has asked companies to disclose any significant exposure to bankruptcies or to the crypto-asset sector in general. This follows the bankruptcy of the FTX cryptocurrency exchange and other failures this year.

By using the term ‘material’, the SEC only asks companies to disclose items that could affect their balance sheet or profitability to the tune of 10% or more. However, you also want to see disclosures about crypto assets used as collateral for loans because it is likely that additional collateral has been requested and the value of the collateral has decreased.

While it can be simple to determine if a company is exposed to one of the bankrupt crypto firms, some of the SEC considerations can be more challenging.

For example, if it is material to business, the SEC wants a company to assess its exposure to counterparties, customers, custodians, or other participants in the crypto-asset industry. In addition to issues like the excessive refunds those parties were exposed to, it can be difficult to know if a crypto company has “experienced significant corporate compliance failures.”

While not explicitly stated in the guidance, the SEC views most crypto companies as having compliance failures because it considers most cryptocurrencies to be securities. And the companies involved are not registered to trade securities.

Earlier this year, the SEC issued an accounting rule requiring all companies that hold crypto assets to include them on their balance sheet. Assets held in custody are generally treated as customer deposit boxes: they belong to the customer and do not touch the bank’s or custodian’s balance sheet. Therefore, the SEC rule makes this balance sheet treatment highly unusual.

On the one hand, custodial banks were unhappy with this rule, as it strongly discouraged them from providing crypto-custody or even custody of digital securities. However, it also requires pure crypto players to provide more details about how much crypto they care for, rather than just figures about their own assets.