The Securities and Exchange Commission (SEC) recently escalated concerns regarding Coinbase Global Inc.’s accounting practices surrounding cryptocurrency assets, following its actions against other firms for similar practices. This scrutiny came to light when the SEC publicly disclosed a comment letter it had sent to Marathon Digital Holdings Inc. in April. The letter criticized Marathon Digital’s use of non-GAAP financial measures that excluded the impact of a new accounting standard from the Financial Accounting Standards Board (FASB).
Coinbase, in a parallel move to Marathon Digital, opted for early adoption of the FASB’s new rule, which shifts the accounting treatment of crypto assets from a cost-less-impairment model to a fair-value model. This change, slated for full implementation in 2025 but permissible for early adoption, addresses the inherent volatility and valuation challenges posed by cryptocurrencies like Bitcoin and Ethereum. Previously, these assets were treated as intangible assets, recorded at historical cost, and subject to impairment assessments if their value declined over time.
Olga Usvyatsky, a respected figure in financial research and authorship, highlighted the potential for earnings volatility introduced by this new accounting rule. Under the previous regime, companies could only write down the value of their crypto holdings if they decreased in value, without the ability to reverse those impairments if asset values rebounded. To manage this volatility in reported earnings, companies such as Coinbase adjusted their financial reporting by excluding crypto-impairment costs from their adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) calculations.
While permissible under specific conditions, these adjustments must adhere strictly to SEC guidelines outlined in Regulation G. The SEC’s primary concern is that such exclusions may result in individually tailored non-GAAP metrics that could potentially mislead investors by not providing a standardized view of financial performance consistent with Generally Accepted Accounting Principles (GAAP). Coinbase’s exclusion of fair-value adjustments related to crypto assets held for investment purposes in its post-adoption financial disclosures has drawn particular regulatory scrutiny in this regard.
Francine McKenna, a seasoned financial journalist and commentator, noted that SEC comment letters, such as those issued to Marathon Digital, typically serve as a prompt for companies to reassess and rectify their accounting practices. However, companies often continue these practices until explicitly directed to cease by the SEC. McKenna emphasized the SEC’s stance on eliminating individually tailored non-GAAP measures promptly, echoing concerns expressed by Usvyatsky and other industry analysts regarding potential misapplications of accounting adjustments in financial reporting.
In response to previous inquiries, Coinbase has defended its approach by clarifying adjustments made to its definition of adjusted EBITDA, emphasizing that these adjustments reflect the investment nature of crypto assets rather than regular operational expenses. Nevertheless, ongoing SEC review underscores continued scrutiny over whether these adjustments align with regulatory standards and adequately inform investors about the impact of volatile asset valuations on the company’s financial performance.
As Coinbase navigates these regulatory challenges, market reactions have varied, reflecting a blend of investor confidence in its growth prospects and apprehension about regulatory risks. The ultimate outcome of these regulatory interactions will likely influence how Coinbase and other industry players manage and disclose their exposure to cryptocurrency assets in the future. This process is pivotal in shaping industry practices and investor perceptions surrounding the evolving regulatory landscape for digital assets.