The Proposed Guidance would require enhanced criteria for coin-listing and delisting procedures for New York-licensed virtual currency entities.

By Jenny Cieplak, Arthur S. Long, Yvette D. Valdez, Stephen P. Wink, Ian Irlander, and Deric Behar

On September 18, 2023, the New York Department of Financial Services (DFS) issued Proposed Updates to Guidance Regarding Listing of Virtual Currencies (the Proposed Guidance) pursuant to its ongoing VOLT initiative to strengthen the oversight of virtual currencies.

The Proposed Guidance updates DFS’s general framework for the creation of firm-specific policies by virtual currency entities[1] (VCEs) with respect to the adoption, listing or delisting of a virtual currency. It provides for a self-certification process for listing coins provided such VCE has a DFS-approved coin-listing policy. Notably, VCEs that do not have an approved coin-listing policy may only list coins that are included in the DFS virtual currency “Greenlist” or that are individually approved by DFS for listing by such VCE as part of an application for a material change to business under NYCRR 200.10. However, DFS may at any time and in its sole discretion require VCEs to delist or limit New Yorkers’ access to specific coins.

DFS’s stated goals under the policy include consumer protection as well as safety and soundness of VCEs.

The new standard aims to improve accounting treatment of certain digital assets under GAAP and may pave the way for increased institutional adoption.

By Jack Barber, Robert J. Malionek, Marlon Q. Paz, Heather Waller, and Deric Behar

On September 6, 2023, the Financial Accounting Standards Board (FASB)[1] voted to approve Accounting for and Disclosure of Crypto Assets, an Accounting Standards Update (ASU) to FASB Accounting Standards Codification (ASC) Topic 350 (Intangibles—Goodwill and Other), originally proposed in March 2023. The ASU will standardize the treatment of certain digital assets under US generally accepted accounting principles (GAAP) (the Update).

According to FASB, market feedback indicated concern with the current accounting methodology for crypto assets under ASC 350 as indefinite-lived intangible assets (whereby assets must be calculated at a historical cost less impairment, such as for trademarks). The methodology reflects “only the decreases, but not the increases, in the value of crypto assets in the financial statements until they are sold,” and therefore “does not provide investors . . . with decision-useful information . . . that reflects (1) the underlying economics of those assets and (2) an entity’s financial position.”

To address FASB’s concern, the Update now requires an entity to measure crypto assets at fair value[2] each reporting period with changes in fair value recognized in net income.

The Update also mandates enhanced disclosure requirements concerning an entity’s crypto asset holdings, intended to improve information available to investors.

In its second action involving NFTs, the SEC targets an offering tied to fundraising and promises of future value.

By Ghaith Mahmood, Nima H. Mohebbi, Stephen P. Wink, Douglas K. Yatter, Adam Zuckerman, Luca Marquard, and Deric Behar

On September 13, 2023, the Securities and Exchange Commission (SEC) issued a cease-and-desist order (the Order) against Stoner Cats 2, LLC (SC2) for an alleged unregistered securities offering relating to SC2’s sale of $8.2 million worth of non-fungible tokens (NFTs). The SEC alleged that the NFTs were issued to the public to finance the production of a web-based animated series by the same name.

SC2 agreed to a settlement that includes a civil monetary penalty of $1 million and ceasing and desisting from violating the Securities Act of 1933. SC2 neither admitted nor denied any wrongdoing as part of the settlement, which does not include any allegations of misleading or fraudulent statements.

The SEC obtained this settlement a few weeks after its first enforcement action against an NFT issuer (for more information, see this Latham post). This second action may signal a meaningful escalation in the area of NFTs.