After FTX Collapse, SEC Urges Firms To Disclose Crypto Risks

Key Insights

• SEC’s division of corporation finance has introduced new guidance to crypto companies.
• This guidance compels the companies to reveal if they have been affected by the recent crisis in the ecosystem.
•  The guidance contains letters on what the affected firms should share with their investors. 

Since the FTX debacle and other irregularities in the crypto ecosystem, the Securities and Exchange Commission (SEC) and other regulatory agencies have come under fire.  Industry players berate these regulatory bodies for their lack of enforcement in high-profile cases. 

On this premise, the SEC has increased its crypto oversight functions in recent months— through its division of corporation finance. The division that oversees disclosure practices of issues of securities registered by the Government.

One of those newly introduced policies is the corporate finance division of the SEC calling on crypto firms to disclose exposure to crypto bankruptcies and risks. These and more are contained in the new guidelines issued by this US regulatory body. 

SEC Introduces Disclosure Guidelines

The United States Securities and Exchange Commission (SEC) has unveiled new guidance toward increasing its oversight function. The guidance will compel publicly traded companies to disclose their exposure to digital assets. That is, any public companies affected by the recent crisis in the crypto market should share some information with their investors. 

 SEC’s Division of Corporation Finance noted that the recent crisis in the crypto asset has caused “widespread disruption. Significantly, the impact of various crises such as the FTX debacle, BlockFi crisis, Three Arrows Capital, and Terra Luna crash — have caused huge damage to investors’ confidence. 

Therefore, the SEC’s division of Corporation finance expects these companies to have disclosure obligations. Federal Securities law should mandate these firms to disclose whether the events could impact their business. Similarly, the firms should signify if they have any financially material exposure to counterparties that have filed for bankruptcy. 

The newly released guidance contains an example letter addressed to companies asking for additional disclosures. It will contain disclosures about the company’s exposure to crypto bankruptcies, market volatility, and other significant developments in the crypto ecosystem. 

Details of SEC’s Guidance

The sample letter issued to companies— that might have been affected by the recent market turmoil— reveals what is expected from public firms. The letter urges these firms to share vital information with their investors. They include depreciated stock prices, loss of customer demand, and risk of legal proceedings. 

The guidelines contain “questions” detailing what the SEC expects of these affected companies. 

The first question asks the firm to disclose any significant crypto asset market development”. That is any market development that could impact the company’s financial condition. Similarly, the question includes revealing results, share price, and price volatility’s impact on digital assets. 

Furthermore, other questions urge the companies to explain to their investors how bankruptcies have or may impact their business. Significantly, such a company should discuss if it has experienced “excessive redemptions or withdrawals during the period. 

Conclusively, SEC’s guidance expects the company to describe any material risk that regulatory developments might pose to crypto assets.