Dive Brief:

• The Securities and Exchange Commission (SEC) fined NVIDIA $5.5 million for allegedly failing to disclose the impact of cryptocurrency mining on the company’s sales of graphics processing units (GPUs) during two consecutive quarters in fiscal year 2018.
• Despite inquiries from investors and analysts, NVIDIA did not report that “cryptomining was a significant element of its material revenue growth for the sale of its” GPUs, which it designed and marketed for gaming, the SEC said. A NVIDIA spokesperson declined to comment.
• “NVIDIA’s disclosure failures deprived investors of critical information to evaluate the company’s business in a key market,” according to Kristina Littman, chief of the crypto assets and cyber unit with the SEC’s Enforcement Division. “All issuers, including those that pursue opportunities involving emerging technology, must ensure that their disclosures are timely, complete and accurate.”

Dive Insight:

The SEC — and the Biden administration more broadly — have sought to safeguard investors, consumers and businesses against abuses during the boom in cryptocurrencies and other digital assets.

Non-state digital assets soared to a total market capitalization of $3 trillion in November from $14 billion in 2016, while approximately 40 million U.S. citizens have invested in, traded or used cryptocurrencies, the White House said, citing unidentified surveys.

President Joe Biden signed an executive order in March aimed at “ensuring responsible development of digital assets.”

“Dramatic growth” in markets for digital assets has “profound implications for the protection of consumers, investors and businesses, including data privacy and security; financial stability and systemic risk; crime; national security; the ability to exercise human rights; financial inclusion and equity; and energy demand and climate change,” the White House said.

SEC Chair Gary Gensler has repeatedly warned about weak investor protections in the crypto market, comparing it to “the Wild West." The agency issued guidance saying that companies should disclose the risks to investors from cryptocurrencies held on behalf of customers and account for the assets as liabilities. The guidance went into effect last month.

The SEC noted an increase in the number of companies that enable customers to transact in crypto-assets, while maintaining the cryptographic key information needed to hold and safeguard the assets.

Such activity poses “unique risks and uncertainties” in technology, law and regulation that “can have a significant impact on the entity’s operations and financial condition” and should be included as a liability on a company’s balance sheet, the SEC said.

The SEC charge against NVIDIA focused on the potential harm to investors from NVIDIA’s alleged decision to withhold information that would have clearly identified cryptomining as the spur for a surge in sales revenue.

The SEC enforcement of disclosure rules coincides with a crypto market slump that has slammed investors with billions of dollars in losses.

During the past month shares in Coinbase, the biggest U.S. exchange for cryptocurrencies, have plummeted more than 62%, while bitcoin and ethereum have plunged 23% and 27%, respectively.

NVIDIA rode the rush into crypto assets. It realized during the second and third fiscal quarters of 2018 that customers were increasingly using its GPUs for cryptomining ethereum and other crypto assets, the SEC said.

The company's gaming revenue surged year-over-year by 52% and 25% during the second and third fiscal quarters of 2018, respectively, according to the SEC.

At the same time, investors and analysts concerned about the volatility of some crypto asset prices “probed the significance of cryptomining to NVIDIA’s gaming business to determine how sustainable the contributions to the company’s largest specialized market would be,” the SEC said.

The company “had information indicating that cryptomining was a significant factor in the year-over-year growth in revenue from the sale of GPUs,” the SEC said. Yet NVIDIA did not disclose such findings.

The SEC also found that NVIDIA failed to maintain adequate disclosure controls and procedures. The company agreed to pay the $5.5 million penalty without admitting or denying SEC findings.