The Sarbanes-Oxley Act (known as SOX) and the Center for Audit Quality brought SEC Chair Gary Gensler to a webcast today with interviewer Rob Schmidt of Capitol Account.
Sarbanes-Oxley Act dates back to 2002 when accounting scandals from companies such as Enron and WorldCom were highlighting the critical need for better transparency, governance and reporting by public companies. The transparency afforded by the blockchain would seem to be a SOX dream to a degree with the ability to potentially audit an open and transparent ledger.
After his opening remarks which were devoted to traditional finance markets and the implementation of SOX, Schmidt asked Gensler about crypto and accounting. (The Chair seemed mildly frustrated about getting a crypto question):
(lightly edited for clarity)
“Speaking of public comment and accounting standards, there’s been a lot of pushback and your Staff Accounting Bulletin 121 on crypto accounting and some people say that it’s basically the SEC is creating a gap and there should be more public input. I wonder if you could speak to some of those criticisms.”
“Let me just say, it goes back to the 1930s. But, Congress did give the Securities and Exchange Commission way back in the early 1930s oversight of accounting for public companies. And over the decades, our first three or four decades in service, we put out various accounting bulletins. They were called something different than staff accounting bulletins at the time.
And then when FASB was created about 15 years ago, we started to number what we did differently. So you said this was ‘Staff Accounting Bulletin 121’ – that’s because there’s been 120 before this over 50 years. So you could do the math. That’s two to three a year. I think there’s been two of them since I’ve been Chair.
Paul Munter, our chief accountant, leads that and this was consistent with what we’ve done on the other 120 of them. And this is the same process that we’ve gone into before and and gives issuers – public company issuers – advice, and in this case, we had a number of companies coming to us saying, ‘How do you think this should be accounted for?’
It’s very different than other parts of the market. Custody – what does custody mean? What custody in crypto often means is that the public no longer has ownership of their Bitcoin or cryptocurrency.
In fact, if the wallet provider or the crypto exchange or crypto lending platform goes bankrupt – and we’ve had a number of go bankrupt in the last two months, Rob (Chair Gensler emphasizes interviewer’s first name) – when they go bankrupt, guess what? – The customers are just in line at bankruptcy court.
So, we’ve had a lot of problems over the years with companies trying to push things off balance sheet. Just reference the 2008 financial crisis if you wish. And so Paul and his team took this up and thoughtfully put out a staff accounting bulletin that the custody arrangements aren’t well enough developed and that crypto is sufficiently different than custody for stocks and bonds. That this should be on balance sheet.”