The Securities and Exchange Commission (SEC) has published guidelines for crypto exchanges promoting full and fair disclosure. The illustrative letter defines information which is of particular interest to the SEC. Companies should analyze such information when releasing documents and disclosing their data.
More than just disclosure
The sample letter describes recommendations for crypto exchanges that cover more than simply the amount of crypto held.
Provide disclosure of any significant crypto asset market developments material to understanding or assessing your business, financial condition and results of operations, or share price since your last reporting period, including any material impact from the price volatility of crypto assets.
The guidelines also include recommendations on exposure to other participants of the crypto market, risks related to the liquidity of crypto exchanges and their ability to attract funding, as well as risks due to “legal proceedings, investigations, or regulatory impacts” in the crypto markets.
Describe any material risk to you, either direct or indirect, due to excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals, of crypto assets. Identify any material concentrations of risk and quantify any material exposures.
The SEC explained the need for the new document based on Rule 408 of the Securities Act and Rule 12b-20 of the Exchange Act. According to these rules, exchanges may need to disclose additional information “as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”
The Commission has also invited exchanges to discuss the “downstream effect” and analyze the impact of bankruptcies of third parties on their business, partners, and clients.
To the extent material, discuss how the bankruptcies of XX and XX and the downstream effects of those bankruptcies have impacted or may impact your business, financial condition, customers, and counterparties, either directly or indirectly. Clarify whether you have material assets that may not be recovered due to the bankruptcies or may otherwise be lost or misappropriated.
The Commission has also urged exchanges to ensure the disclosure of any “reputational harm” they might face due to the recent market disruption.
SEC recommendations amid the market chaos
The guidelines are published during the time when many crypto firms face profound difficulties due to the exposure to insolvent companies.
For example, Gemini, a crypto exchange, had to stop withdrawals of Gemini Earn after the crypto broker Genesis faced major liquidity issues. Gemini Earn offered clients interest between 0.45% and 8.5% in exchange for depositing their crypto. It was implemented with the help of Genesis as a third-party lender.
In its guidelines, the SEC has also recommended exchanges to describe in detail any risks due to “excessive redemptions or withdrawals” and “a suspension of redemptions or withdrawals”, as well as any risks related to “unauthorized or impermissible customer access” to their products and services outside of the jurisdictions where they have received authorization to operate.
