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In our previous article, we explained the topic of holding clients’ assets off a company’s balance sheet. In this article, we will dive into the practice of entities holding clients' assets on-balance sheets, explore why some financial institutions follow this approach, and discuss the potential disadvantages. Additionally, we will discuss why iTrustCapital does not adopt this approach.
Understanding On-Balance Sheet Assets:
When financial institutions hold clients’ assets on their balance sheets, they record them in the company's financial statements. This means that the assets are considered part of the company's liabilities and net worth. The value of the company along with the clients' assets are directly tied to the financial health and performance of the institution.
Reasons why financial institutions follow this approach
There are several reasons why financial institutions may choose to include clients’ assets in their balance sheets.
Perception of Stability and Financial Strength
Holding clients’ assets can increase the perceived value of a financial institution. A larger balance sheet may project an image of stability and financial strength, potentially attracting more clients and investors.
Ease of Liquidity and Leveraging for Profits
Another reason financial institutions may opt for this approach is the ease of accessing clients' funds and leveraging their assets to gain profits. As mentioned in our other article, several companies in 2022 actively leveraged clients' assets entrusted to them as a way to raise funds.
Accessibility to Capital Markets
A larger balance sheet may provide better access to capital markets, enabling companies to raise funds more easily through debt or equity issuance.
Multiple events in 2022 demonstrated the risks of the crypto industry’s common practice of including client assets on the balance sheet. There are numerous examples of companies betting or leveraging positions using client funds and then losing those assets. In many cases, it was the clients who ultimately lost assets despite not being the ones directly making those bets.
Additionally, this approach may limit transparency. This can make it more difficult for clients and investors to assess the true financial health of the institution, potentially leading to a loss of trust and credibility.
Incorporating clients' assets on balance sheets can lead to potential conflicts of interest, as the financial institution's interests may not always align with those of its clients. For instance, an institution might prioritize its balance sheet growth over the clients' best interests.
Moreover, this practice may attract greater regulatory scrutiny. Regulators might be concerned about the potential risks associated with this approach, leading to increased compliance costs and regulatory capital requirements.
While holding clients' assets on the balance sheet can provide some benefits to financial institutions, it also comes with considerable disadvantages and risks. iTrustCapital, recognizing these drawbacks, opts not to follow this approach. By keeping clients' assets off-balance sheet, iTrustCapital can better align its interests with those of its clients, maintain transparency, and reduce the risks associated with incorporating clients' assets into its balance sheet. To learn more and open an account today!
This article is for information purposes only. It does not constitute investment advice in any way. It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.
iTrustCapital is a cryptocurrency IRA software platform. It is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrustCapital is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.
Cryptocurrencies are a speculative investment with risk of loss. Precious metals are a speculative investment with risk of loss. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Clients do not receive a choice of custody partner. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.
Some taxes and conditions may apply depending on the type of IRA account. Investors assume the risk of all purchase and sale decisions. iTrustCapital makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrustCapital does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional.
iTrustCapital makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrustCapital disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.
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