The Securities and Exchange Commission is taking a close look at the trend toward blockchain technology, including the burgeoning investments in bitcoin and initial coin offerings.
“In the near term, our interest in blockchain technology applications stems from the fact that the sponsors of this work may be utilizing capital from investors, in particular our Main Street investors, to develop possible applications in light of the fact that financial information is important to investor decision making,” said SEC chief accountant Wesley Bricker during a speech Tuesday at Financial Executives International’s Current Financial Reporting Issues conference in New York. “Thus, OCA [the SEC’s Office of the Chief Accountant] is investing time to understand blockchain technology applications such as cryptocurrencies, coins, tokens and so forth as they are offered, bought, held, sold, and traded. I suggest that it is warranted for the accounting profession to also invest time in understanding these areas. I have not heard particularly good rationales for turning off—or never turning on—the profession’s lamps at this time.”
His staff is still trying to better understand the technology. “While the OCA staff is working to better understand this area of blockchain technology applications, we are indeed journeying with a compass; namely, the Commission’s existing accounting and auditing requirements, books and records requirements, auditor independence rules, and the federal securities laws more generally,” said Bricker. “These collectively form a framework for us, and they should as well for everyone, because these requirements apply to all matters within the purview of the SEC, even if they were developed prior to the emergence of the types of facts and circumstances, including blockchain technology applications.”
He talked in September at an AICPA conference about the requirements related to capital raising involving so-called initial coin offerings, or ICOs, and reiterated at the FEI CFRI conference the need for accountants to familiarize themselves with emerging technologies like blockchain, which uses a distributed ledger system to preserve records of transactions.
“I understand that many of your organizations and many others may be currently undertaking research and development related to blockchain technology and its applications,” Bricker added. “I realize that none of us can foresee exactly how these technologies may be developed and applied in the coming months and years. Nonetheless, let me conclude by emphasizing that, as with the OCA staff, I think it is important that those in the accounting profession invest the time to understand new trends and developments in technology and commerce to identify their potential effects on financial reporting to investors. I look forward to the meaningful dialogue that will result.”
Later, during a press conference, Bricker was asked to elaborate on any concerns he might have about blockchain. “There are two fundamental pieces here,” he said. “One is turning on the light. Blockchain technology and its related applications need to be carefully understood to understand what they do and do not do. I see a lot of marketing. I’d like to see a lot more substance. The second piece is turning a compass. That is, our guiding frameworks in terms of disclosure and a capital raising for secondary transactions can be applied, and the Commission demonstrated during the 21(a) report how it can be applied. The same is true for financial reporting. The same is true for independence. While there are important aspects of the technology to be understood when applying those frameworks to the technology, my message is we’re journeying with those frameworks in mind. We’re not journeying with a new framework simply because technology is changing.”
The SEC staff recently released some guidance in July on how initial coin offerings may look like securities offerings, and could be regulated as securities offerings. Also in July, the SEC issued a Report of Investigation under Section 21(a) of the Securities Exchange Act of 1934 describing an SEC investigation of the DAO, a virtual organization, and its use of distributed ledger or blockchain technology to facilitate the offer and sale of DAO Tokens to raise capital. The SEC applied existing U.S. federal securities laws to this new paradigm, and found the DAO Tokens were securities. The SEC stressed that those who offer and sell securities in the U.S. are required to comply with federal securities laws, regardless of whether the securities are purchased with virtual currencies or distributed with blockchain technology.
“The federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies,” the SEC warned in July. “Many registration exemptions require that investors are accredited investors; some others have investment limits. Be highly suspicious of private (i.e., unregistered) investment opportunities that do not ask about your net worth or income or whether investment limits apply.”
“The implication is if you are offering or selling a security, the offering and the sale must either be registered or exempt or it’s not legal,” said Bricker. “And that registration document must include financial disclosures.”
Bricker also discussed how the SEC would deal with the new accounting standards for revenue recognition, leasing and financial instruments, and how it would regard the role of professional judgment in the principles-based standards. He disagreed that there might be more leeway under the new standards.
“I don’t think that’s leeway at all,” he said. “I think it’s much harder to apply a standard that requires getting together finance with the business groups, understanding the transactions and reporting those transactions for what they are. That’s a lot more difficult than just following a bright line that keeps things out of the financial statements rather than getting it and understanding the transaction that inform the judgments about actually reporting information about the full transaction. Our existing model for revenue, for example, was built with different industry-specific conventions and experience over time, but it keeps a lot of reporting out of the financial statements, and we’re moving toward a model that requires the entirety of the contract to be addressed within the primary financial statements in the disclosure. That’s not leeway and that’s not easy, which is why we’ve been stressing the importance of really being diligent about the application of the standard.”
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