After restricting clients from purchasing Gamestop (GME) in a frenzied meme stock bubble earlier this year, Robinhood Markets (HOOD), a trading platform, is warning it may also bungle transactions on assets other than stocks. In its latest 10-Q, Robinhood revealed all of the assets its clients hold are at risk:

“... we might mishandle the cash, securities, and cryptocurrencies we hold on behalf of customers, and our exposure to liability for operational errors in clearing functions…”

The warning is likely a result, in part, of the credit risk Robinhood is exposed to when routing cryptocurrency trades, which are not settled through central clearing houses as equities and options are. It means Robinhood is solely liable if a crypto counterparty defaults. Importantly, there can be up to a 24-hour gap between the time a cryptocurrency is delivered and when payment for it is made. In that interval between delivery and payment, payment obligations are generally unsecured.

In the latest quarterly report, Robinhood concedes:

“It is not uncommon for us to have an intra-day outstanding net receivable of $100 million that we are owed by any one market maker.”

Though most crypto is housed offline in what Robinhood calls “cold wallets”, the company also holds crypto on behalf of clients in “hot wallets” which are managed online and used in daily operations. If the private keys necessary to prevent thieves from stealing clients’ crypto are lost, destroyed, or Robinhood can’t access them— and no private key backup is accessible— the company will be unable to access the crypto hot or cold wallets.

Similar to a recent hack in which hackers took over the Bitcoin SV network and spent coins they didn’t have and prevent other transactions, a hack or the loss of private keys could result in the total loss of a Robinhood customer’s crypto. If Robinhood were required to reimburse customers, new language in the latest quarterly report suggests the company could go under:

“Our insurance coverage for such impropriety is limited and might not cover the extent of loss nor the nature of such loss, in which case we might be liable for the full amount of losses suffered, which could be greater than all of our assets. The total value of crypto assets under our control on behalf of customers is significantly greater than the total value of insurance coverage that would compensate us in the event of theft or other loss of such assets.”

Separately, In its latest quarterly filing, Robinhood disclosed that it discounts operating leases by 7.02%. This rate is significantly higher than Robinhood’s online brokerage peers, which report the following discount rates in recent filings:

-Schwab (SCHW): 2.86%
-Interactive Brokers (IBKR): 4.13%
-E*TRADE (prior to MS acquisition):: 4.3%

Using an inflated discount rate hide’s a firm’s true liabilities from investors.

Robinhood has $264.7 million in future operating lease obligations. The present value of those obligations, according to Robinhood, is $154.5 million. If we use the blended average discount rate for Rbinhood’s peer group— 3.76%— we calculate a lease liability of $223.4 million. It means Robinhood is understating its lease liabilities by approximately $68.9 million, or 26% of its future operating lease obligations.

Robinhood is also using an accounting loophole to exclude certain leases from its balance sheet altogether. In the footnotes of its most recent quarterly filing, Robinhood acknowledged it does not include $53.1 million in leases that have “not yet commenced” on its balance sheet even though the leases have been executed and start in December 2021 .

If we add this to our calculation, Robinhood is understating its lease liabilities by approximately $111.5 million, or 42.1% of its future operating lease obligations and 1.26% of total liabilities.

Excluding “not yet commenced” leases from the balance sheet is an accounting loophole Robinhood and others are using to hide billions of dollars of liabilities from investors.

Under the loophole, companies can omit leases from the balance sheet that haven’t started as well as corporate offices under construction or build-to-suit arrangements. It’s seemingly inconsistent with FASB’s guidance on the topic which states if a lease is legally binding— as Accenture acknowledges— Topic 842 (ASU 2016-02) makes clear it must be accounted for on the balance sheet:

“A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)...”