SEC disclosure trends in crypto and digital assets
Activity in the crypto space is showing no signs of slowing down, despite the volatility seen throughout 2022. Today, businesses of all kinds are involved with crypto. In fact, 48% of the executives responding to our PwC 2022 US Metaverse Survey told us that they’ve already incorporated cryptocurrency into their company strategies — or are in the process of doing so. Meanwhile, the SEC continues to release new guidance for reporting entities with a focus on safeguarding customers' crypto assets and consumer protection.
Given all this interest, it’s helpful to understand the volume of digital assets, crypto and other related terms mentioned in SEC filings and what we can learn from those disclosures. Not surprisingly, we found that the number of companies with crypto-related disclosures has increased rapidly over the past few years.
Our analysis was performed based on use of certain key terms in Forms 10-K and 10-Q filings for the four 12-month periods ended August 15 from 2019 to 20221.
The word on the street is crypto
We saw a modest increase in the number of filers discussing crypto, blockchain and digital assets from 2019 to 2020. But the number of mentions of these terms in 2021 and 2022 increased significantly. In the two-year period ending August 15, 2022, “blank check” companies, including SPACs, represented the highest percentage of companies discussing crypto and related terms in their filings. During the four-year period of our analysis, the percentage of Fortune 500 companies discussing crypto, blockchain and digital assets remained consistent at approximately 7%, indicating that the significant growth in public companies making these disclosures was driven by companies outside of the largest SEC filers.
Key findings from the data:
- Specific crypto currencies: 149% increase from 2020 to 2022
- NFT: 3,350% increase from 2020 to 2022
- Defi: 3,300% increase from 2020 to 2022
- Blockchain: 109% increase from 2020 to 2022
- Crypto: 139% increase from 2020 to 2022
- Digital assets: 152% increase from 2020 to 2022
The evolving use case of blockchain technology: NFTs
Non-fungible tokens (NFTs) have taken the world by storm, with over $25 billion in sales volume in 2021 and $37 billion in less than six months in 2022.2 3 Many companies are actively looking for ways to utilize NFTs to engage with their customers in new and different ways. While we believe the number of companies developing and implementing their NFT strategies will continue to rise significantly in the coming years, 2022 is already demonstrating increased momentum in the NFT space.
While business models and uses for NFTs continue to evolve, important legal, tax and accounting considerations must be factored into a company’s decision to enter the space.
NFT Mentions in SEC Disclosures, 2019 - 2022
Source: PwC analysis
SAB 121
In March 2022, the SEC staff released Staff Accounting Bulletin No. 121 (SAB 121), which provides guidance for reporting entities that engage in activities in which they have an obligation to safeguard customers' crypto assets. Calendar year-end public companies were required to comply with the guidance in Q2 2022. The guidance requires a reporting entity that performs crypto asset custodial activities, whether directly or through an agent acting on its behalf, to record a safeguarding liability with a corresponding asset measured at the fair value of the crypto assets safeguarded by the reporting entity for its customers. We took a look at disclosures by those companies that were impacted by SAB 121 based on SEC Reports filed from issuance of SAB 121 through August 15, 2022.4
During the Q1 2022 reporting cycle (through May 16, 2022)
23 companies discussed the potential impact of adopting SAB 121
| 9 indicated that they were evaluating the impact of SAB 121 on their financial statements. | 8 indicated they expected a material impact to their statement of financial position. | 6 indicated they did not expect material impact to their statement of financial position. |
During the Q2 2022 reporting cycle (through August 15, 2022), we identified 25 companies that mentioned SAB 121
| 14 disclosed that SAB 121 is not material to their financial statements. | 11 disclosed that SAB 121 had a material impact, ranging from $1 million to $88 billion. |
Top three highest quantitative disclosures
| Quantitative impact | % of total assets | Disclosed separately on the face of the balance sheet |
|
| Registrant 1 | $88 billion | 84% | Yes |
| Registrant 2 | $8.6 billion | 36% | Yes |
| Registrant 3 | $596 million | 0.8% | No |
What’s next?
As the data highlights, we continue to see acceleration in the mainstream institutional embrace of digital assets. This trend cuts across multiple industries, from financial technology and payments to traditional technology, media and entertainment companies. Further, the nascency of digital assets brings new risks and new governance challenges. As of July 2022, it is estimated that over $1.9 billion in digital assets has been lost due to hack or theft.5 In response to these risks and challenges, regulators around the world are committed to improving existing reporting, monitoring and enforcement frameworks with a coordinated approach. In the US, a Biden administration executive order seeks to harmonize the approach in regulating digital assets and related transactions.6 Regulators continue to strive for a careful balance between stringent investor protections and fostering an environment for legitimate innovation to flourish.
Meanwhile, the FASB is actively scoping a project for addressing the accounting for digital assets. Many stakeholders hope that the outcome of such standard setting will result in certain digital assets being recognized at fair value on an ongoing basis. And the AICPA’s Digital Asset Working Group recently (June 2022) updated the Accounting for and Auditing of Digital Assets Practice Aid, which provides nonauthoritative interpretive guidance on a variety of digital asset transactions.
We do not expect things to slow down anytime soon, and those operating in the crypto space should take measures to ensure they stay on course. For those already participating and those who are contemplating entering this space, here are topics we believe are important to keep top of mind:
- Adequacy of internal controls at service organizations (particularly custodians)
- Internal controls relating to custody of digital assets
- Compliance with global regulatory requirements
- Accounting and valuation implications
- Tax reporting
In this rapidly evolving space, it is important to ensure you appropriately consider these matters as well as ensuring you have lock-step coordination with your auditors, advisors and regulators.
1 Key search criteria utilized within filed 10-Ks and 10-Qs were crypto, crypto currency, digital currency, cryptocurrency, digital assets, blockchain, non fungible token, non-fungible token, decentralized finance, bitcoin, ethereum, stablecoin, initial coin offering, and tokenization.
2 “NFT sales hit $25 billion in 2021, but growth shows signs of slowing,” Reuters, January 11, 2022, accessed via Factiva, June 2, 2022.
3 Locke, Taylor, “The NFT market is probably not as down as you think it is,” Fortune, May 5, 2022, accessed via Factiva, June 2, 2022.
4 Searched “SAB 121” within filed 10-Ks, 10-Qs, S-1s, S-4s, F-4s
5 Chainalysis, “Mid-year Crypto Crime Update,” August 16, 2022.
6 Executive Order on Ensuring Responsible Development of Digital Assets, refer to: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets
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