SCHWAB CHARLES CORP 10-Q

Item 1A. Risk Factors In evaluating the Company and our business, you should carefully consider the risks and uncertainties described in Part I – Item 1A – Risk Factors in our most recent Annual Report on Form 10-K, together with the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes in Part I – Item 1 and Part I – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations. Except as described below with respect to our spot cryptocurrency offer, there have been no material changes from the risk factors set forth in our 2025 Annual Report on Form 10-K. Additional risks not presently known to us, or that we currently believe to be immaterial, may also adversely affect our business, financial condition, results of operations, or cash flows. Cryptocurrency Cryptocurrency, or crypto, uses cryptography blockchain technology, and distributed networks to execute, record, and verify transactions. Unlike traditional financial markets, there may be no party that can prevent or reverse fraudulent transactions, restore lost or stolen assets, or halt operations during a disruption. This absence of a central counterparty or settlement intermediary makes cryptocurrencies susceptible to theft, fraud, and operational disruption and may make recovery of stolen assets difficult or impossible. Cryptocurrency markets and service providers have been subject to regulatory actions, adverse publicity, and significant volatility. Custodians and other service providers have been targets of sophisticated cyber attacks, which may include intrusion into operations infrastructure, tampering with transaction-related software, theft or substitution of hardware security modules, impersonation of authorized signers, social engineering of personnel, manipulation of internal address books, and exploitation of administrative procedures. Clients’ cryptocurrency held through Schwab Crypto TM is not a deposit or a security and is not protected by the FDIC or the Securities Investor Protection Corporation (SIPC). Any operational or security failure at our sub-custodian could result in loss or theft of clients’ cryptocurrency and expose us to remediation costs, regulatory scrutiny, and reputational harm. Our spot cryptocurrency offer currently relies on our sub-custodian to safeguard cryptocurrency held by our clients. Any operational failure, cybersecurity incident, fraud, insolvency, or other disruption at the sub-custodian, or a failure of the underlying blockchain infrastructure, could result in the theft or loss of our clients’ cryptocurrency, which may not be recoverable. Cryptocurrency custodied through digital wallets is generally accessible only through associated private keys, which the sub-custodian holds and manages as part of its custodial services. Any loss or compromise of private keys or wallets, including through error, misconduct, or cyberattack affecting the sub-custodian or its personnel, could impair our clients’ ability to access or sell their cryptocurrency and could expose us to remediation obligations, financial losses, regulatory scrutiny, and reputational harm. Our sub-custodian is contractually liable for the loss of our clients’ cryptocurrency under custody, but it may not have sufficient financial resources to satisfy its obligations in the event of a significant loss. Under certain circumstances, CSPB, as custodian, could be liable for losses greater than amounts recoverable from the sub-custodian, which could adversely affect our business. Uncertainty about the treatment of our clients’ cryptocurrency in a receivership, conservatorship, bankruptcy, or similar proceeding could result in delays or losses for clients, claims against us, and reputational harm to the Company. Although the sub-custodian expects to hold clients’ cryptocurrencies in segregated accounts on a bankruptcy-remote basis, the legal treatment of cryptocurrency custody arrangements has not been tested broadly in U.S. courts. In a receivership, conservatorship, bankruptcy, or similar proceeding involving the sub-custodian or its affiliates, CSPB, or another intermediary in the custody chain, a court, receiver, trustee, or other authority could determine our clients’ cryptocurrencies are the property - 70 - THE CHARLES SCHWAB CORPORATION of an insolvency estate and subject to competing claims or could impose restrictions on distributions to clients while ownership is adjudicated. Even if clients’ cryptocurrencies are ultimately determined not to be part of an insolvency estate, clients could experience delays in accessing their assets due to administrative stays, reconciliation and tracing processes, valuation disputes, or operational constraints on the relevant blockchain networks. Because on-chain transfers are generally irreversible and may be affected by network congestion or protocol events, an insolvency administrator’s ability to return assets in kind may be constrained. Clients may receive distributions later than expected, in a different form, or at a value different from market value at the time of the distribution. Any such outcome could result in client losses, complaints and litigation, increased regulatory scrutiny, and harm to our business or reputation. Uncertainties in or changes to the accounting treatment for cryptocurrencies could adversely affect our financial statements and related disclosures. Accounting literature, standard-setting activity, and regulatory expectations for entities that enable customers to buy, sell, or hold cryptocurrencies continue to develop, and practice is not uniform. As a result, our accounting conclusions and related disclosures may be subject to heightened scrutiny by regulators, auditors, and investors and may change over time. Determining whether and how to recognize revenue, assets, and liabilities related to clients’ cryptocurrencies is complex, involves significant judgment, and depends on the legal rights and obligations reflected in our customer agreements, our arrangements with sub-custodians and other service providers, and our operational practices. Regulatory or standard-setting developments, interpretive guidance, or changes in views by the SEC staff, the Financial Accounting Standards Board, or our auditors could affect recognition and measurement of revenue, assets, and liabilities, and may increase volatility in reported results, and impact key metrics and regulatory capital calculations.