MW Coinbase gets regulatory notice for crypto accounting move that MarketWatch called out months ago

By Ciara Linnane

SEC tells company not to use individually tailored accounting metrics or ones that may be misleading

Coinbase Global Inc. received a regulatory comment letter regarding its accounting for cryptocurrency assets about four months after MarketWatch wrote that it could likely expect one, after the regulator acted against another company for the same practice.

The Securities and Exchange Commission published the comment letter sent to Coinbase $(COIN)$ on its Edgar platform on Tuesday.

The letter is dated Oct. 18 - about four months after MarketWatch reported on a similar letter sent to crypto miner Marathon Digital Holdings Inc. $(MARA)$ in April 2024 that said the company's use of non-GAAP accounting measures that exclude the impact of a new rule from the Financial Accounting Standards Board for crypto assets was an "individually tailored" measure - a big no-no for the SEC. The regulator usually waits a certain amount of time before making comment letters public.

As MarketWatch reported in July, Coinbase did exactly the same thing as Marathon when it opted for early adoption of the new rule, which the FASB agreed to last year.

See also: Coinbase may be facing regulatory action over its accounting for crypto assets

The rule changed the accounting and disclosure for crypto assets to a fair-value model from a cost-less-impairment model. The rule came into effect on Jan. 1, 2025, but early adoption was allowed.

The rule change came in response to requests from companies that hold large amounts of crypto - including MicroStrategy Inc. (MSTR), now called Strategy, and Tesla Inc. $(TSLA)$ - for rules governing accounting of those assets, which are typically volatile.

The rule allows companies to capture the most recent value of a crytpo asset, a change from the previous accounting practice, which was to treat them as intangible assets. Intangible assets include such items as brands, copyright and intellectual-property markers like trademarks.

Under that treatment, companies had to record crypto assets at the historical price at which they were acquired and then make an assessment every reporting period as to whether the value had declined, in which case they would record an impairment.

"Companies complained because they could write the value down but not back up if the asset increased in value," Olga Usvyatsky, a former vice president for research at Audit Analytics and author of Deep Quarry, a Substack publication focused on accounting, said at the time.

Crypto assets have seen large gains as well as losses. Bitcoin, for example, is down about 10% in the year to date but has gained 34% over the last 12 months.

Bitcoin has benefited from President Donald Trump's stance on crypto, which is friendlier than that of previous administrations. The president has signed executive orders to set up a working group to propose a federal regulatory framework governing digital assets and to build a bitcoin reserve.

Usvyatsky had correctly noted last year that the rule would introduce volatility into company earnings if holders of crypto assets had to continually record gains and losses on their income statements.

And she was right in expecting they would do what they do with other items that create volatility, namely to strip out the effect using nonstandard metrics - those that do not comply with Generally Accepted Accounting Principles, the U.S. accounting standard.

Companies are allowed to use such metrics, but they must lead with GAAP-compliant ones, give equal prominence to both and offer a reconciliation of the two. Above all, they are not allowed to create individually tailored metrics or strip out normal recurring operating expenses when using non-GAAP measures.

Coinbase did exactly that, however, according to Usvyatsky.

Before it adopted the new rule, the company stripped crypto-impairment costs out of its adjusted Ebitda reconciliation. Ebitda stands for earnings before interest, taxation, depreciation and amortization.

This could be misleading, as it strips out normal recurring operating expenses.

Then, in the first quarter, when adopting the new rule, the company stripped out the fair-value volatility, which again creates tailored accounting, she said.

"As we predicted, the SEC question cited 100.04, [the rule on] tailored accounting," Usvyatsky said on Wednesday.

Coinbase's stock was down 1.7% Wednesday and has fallen 21% in the last 12 months, while the S&P 500 SPX has gained 5.5%.

-Ciara Linnane

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April 16, 2025 15:51 ET (19:51 GMT)

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