PCSA

What are the regulatory and compliance risks associated with holding crypto in a public biotech company?

Created August 07, 2025 at 12:31 PM

Below is a detailed overview of the regulatory and compliance risks that a publicly‑listed biotechnology company—such as Processa Pharmaceuticals (Nasdaq: PCSA)—faces when it decides to hold cryptocurrency in its corporate treasury. The points are drawn from the broader regulatory framework that applies to all U.S. public companies and are especially relevant given Processa’s recent announcement that it is “evaluating corporate cryptocurrency treasury strategies.”

1. Securities‑Law & Exchange‑Rule Risks

Area	Why it matters for a public biotech	Key regulations / guidance
SEC disclosure obligations	Investors must understand material financial assets, especially volatile ones that could affect liquidity, earnings, or risk profile.	• Item 101 – Description of Business and Item 303 – Management’s Discussion and Analysis (MD&A) in Form 10‑K/10‑Q. • Regulation S‑K (Item 303(a)(3) – “Other Financial Information”).
Nasdaq listing standards	Nasdaq monitors corporate governance, internal controls, and financial reporting. A crypto holding that is inadequately controlled could trigger a listing‑rule breach.	• Nasdaq Rule 5550(b)(2) – “Timely, accurate financial reporting”.
Materiality threshold	Crypto positions can swing wildly; a sudden 50 % decline could be material. Failure to disclose could be deemed a “false or misleading” filing.	• SEC Staff Accounting Bulletin (SAB) 99‑2 – Materiality guidance.
Insider‑trading and market‑manipulation rules	Executives must not trade crypto on the basis of non‑public information about corporate decisions (e.g., a planned token sale, a partnership with a blockchain firm).	• Rule 10b‑5 (anti‑fraud), Rule 10b‑10 (short‑sale reporting).

Practical impact: Processa would need to add a new line item to its balance sheet (digital assets), disclose valuation methodology, and discuss risk factors (volatility, liquidity, cyber‑risk) in its 10‑K/10‑Q filings and proxy statements.

2. Accounting & Financial‑Reporting Risks

Issue	Potential compliance breach	Relevant guidance
Recognition & measurement	Mis‑stating the fair‑value of crypto can lead to material misstatement of assets and equity.	• ASC 820 – Fair value measurement. • ASC 350 – Intangibles (if treated as intangible).
Impairment & revaluation	Crypto is not a cash equivalent; frequent re‑valuation may be required. Failure to record impairments promptly could violate GAAP.	• ASC 360 – Impairment of long‑lived assets.
Classification (cash vs. other assets)	Incorrect classification could affect liquidity ratios (current ratio, cash‑flow metrics) that analysts and lenders watch.	• ASC 305 – Cash and cash equivalents.
Audit evidence & internal controls	Auditors need evidence of custody, third‑party custodial agreements, and controls over private keys. Weak controls could result in a qualified audit opinion.	• PCAOB AS 2201 – Risk assessments of internal controls.
Tax accounting	Incorrectly handling crypto for tax purposes can lead to IRS penalties and SEC scrutiny.	• IRS Revenue Procedure 2023‑XX – Tax treatment of virtual currencies.

Mitigation: Adopt a robust crypto‑accounting policy that spells out: (i) the chosen GAAP classification, (ii) valuation frequency (e.g., daily fair‑value pricing from a reputable exchange), (iii) impairment triggers, and (iv) custody arrangement disclosures.

3. Anti‑Money‑Laundering (AML) & Know‑Your‑Customer (KYC) Risks

Risk	How it manifests for a corporate treasury	Regulatory reference
Use of unregulated exchanges	Buying/selling crypto on platforms that lack AML/KYC could expose the company to funds‑tainting allegations.	• FinCEN Regulation 31 – “Travel Rule”.
Counterparty risk	If a custodian is not a registered Money Services Business (MSB), the company may be deemed to be facilitating illicit transfers.	• FinCEN BSA – “Reporting Requirements”.
Sanctions compliance	Crypto transactions can inadvertently involve sanctioned addresses or entities.	• Office of Foreign Assets Control (OFAC) sanctions list.
Record‑keeping	Failure to retain transaction logs (blockchain hashes, wallet IDs) for the required 5‑year period can lead to enforcement actions.	• 31 CFR § 1010.12 – Record‑keeping.

Mitigation: Use regulated custodial providers that perform AML/KYC on all counterparties, and implement a blockchain transaction monitoring system that flags transfers to/from high‑risk jurisdictions or black‑listed addresses.

4. Cybersecurity & Custody Risks

Risk	Regulatory relevance	Potential consequences
Private‑key theft or loss	If a private key is compromised, the asset is gone; the loss could be treated as a material misstatement.	• SEC Risk‑Factors disclosure requirement. • Potential securities‑fraud claims from investors.
Ransomware / hack of corporate systems	Exposure of wallet credentials could trigger a material breach under the SEC’s Guidance on Cyber‑Incidents (2022).	• Mandatory reporting within 4 business days (SEC Form 8‑K) if the incident is material.
Insufficient internal controls	Lack of segregation of duties, inadequate change‑management over wallets, or missing multi‑factor authentication violates SOX Section 404.	• Auditors may issue a material weakness finding.

Mitigation: Adopt multi‑signature wallets, use cold‑storage for the bulk of holdings, implement regular penetration testing, and integrate crypto custody into the company’s overall Enterprise Risk Management (ERM) framework.

5. Corporate‑Governance & Fiduciary‑Duty Risks

Issue	Why it matters for a biotech company	Relevant law/standard
Board oversight	The board must ensure that treasury‑risk exposure aligns with the company’s strategic focus (i.e., developing NGC cancer therapies). Over‑exposure to crypto could be deemed a breach of the duty of care.	• Delaware General Corporation Law (DGCL) – fiduciary duties.
Conflict of interest	Directors or officers with personal crypto holdings might be perceived as self‑dealing if the company invests in the same assets.	• SEC Rule 10b‑5 – anti‑fraud.
Shareholder activism	Investors (especially institutional biotech funds) may object to speculative crypto holdings, prompting proxy fights or resolutions.	• Nasdaq Listing Rule 5550(b)(4) – shareholder proposals.

Mitigation: Add crypto‑exposure limits to the corporate treasury policy, require board approval for any purchase or sale, and disclose the policy in the proxy statement.

6. Tax‑Compliance Risks

Capital‑gains treatment – Each sale, exchange, or even “use” of crypto (e.g., paying a vendor) creates a taxable event. The company must track cost basis and holding period for each unit.
State‑level taxes – Some states (e.g., New York) have specific reporting requirements for digital assets held by corporations.
International considerations – If Processa’s subsidiaries hold crypto, foreign tax rules and Transfer‑Pricing guidelines apply.

Failure to correctly compute and remit taxes can trigger IRS penalties and state tax audits, which in turn could lead to SEC investigations for inaccurate financial reporting.

7. Market‑Risk & Liquidity Risks (Regulatory Implications)

Volatility – Sharp price swings could affect the company's working‑capital metrics and potentially breach covenants in credit facilities.
Liquidity – In a stressed market, converting crypto to cash may be delayed or costly, affecting the company’s ability to meet payroll, R&D, and clinical‑trial funding obligations.

Regulators view these as operational risks that must be disclosed under SEC Item 303 (“Liquidity and Capital Resources”). If the crypto position threatens the company’s ability to fund its core biotech operations, the SEC could deem the risk material and require a risk‑factor addition in filings.

8. Potential Enforcement Actions & Penalties

Regulator	Possible action	Typical penalty
SEC	Investigation for inadequate disclosure, material misstatement, or violation of antifraud rules.	Fines, disgorgement, injunctions, possible bar on officers.
FINRA	Sanctions if the company’s broker‑dealer relationships facilitate non‑compliant crypto transactions.	Fines, suspension of trading privileges.
CFTC	If the company trades crypto derivatives without registration.	Civil penalties (up to $1 M per violation).
OFAC / Treasury	Penalties for accidental payments to sanctioned parties.	Up to $500 K per violation, plus remedial actions.
IRS	Failure to report taxable crypto transactions.	Interest, penalties up to 25 % of underpayment.

9. Summary Checklist for Processa (or any public biotech)

✔️ Item	Action
Disclosure	Add a dedicated “Digital‑Asset Treasury” section in 10‑K/10‑Q MD&A; disclose valuation method, custody provider, risk factors, and impact on liquidity.
Board approval & oversight	Obtain formal board resolution; assign crypto oversight to the Audit Committee.
Accounting policy	Adopt GAAP‑compliant policy (ASC 820 fair‑value, re‑valuation frequency, impairment triggers).
Custody	Use a regulated, insured custodian; store bulk holdings offline (cold‑storage), implement multi‑sig controls.
AML/KYC	Conduct due diligence on every exchange/custodian; integrate transaction monitoring software.
Cybersecurity	Include crypto wallets in the company’s IT‑security baseline; perform regular audits; have an incident‑response plan.
SOX controls	Document controls over private‑key management and crypto transaction recording; test them annually.
Tax compliance	Set up a dedicated crypto‑tax sub‑ledger; engage tax advisors familiar with virtual‑currency reporting.
Liquidity & covenant monitoring	Model worst‑case crypto price scenarios and ensure covenant ratios remain satisfied.
Stakeholder communication	Provide an investor‑relations FAQ explaining why crypto is being held, the risk mitigation steps, and expected contribution to the balance sheet.

Bottom Line

Holding cryptocurrency in the treasury of a publicly‑traded biotechnology company such as Processa Pharmaceuticals introduces a multilayered compliance landscape:

SEC and Nasdaq disclosure obligations for material assets and risk factors.
GAAP accounting challenges around fair‑value measurement, impairment, and classification.
AML/KYC, sanctions, and tax reporting requirements that apply to every crypto transaction.
Cybersecurity and custody controls that must meet SOX Section 404 standards.
Fiduciary‑duty and governance oversight to ensure crypto exposure does not jeopardize the company’s core mission of developing cancer therapies.

By establishing a formal treasury‑crypto policy, securing regulated custodial services, integrating robust internal controls, and providing transparent, timely disclosures, Processa can mitigate these regulatory risks while leveraging any strategic benefits that cryptocurrency might offer (e.g., diversification, potential upside, or access to innovative financing structures).