Banks have been waiting for their regulators’ anticipated instructions on how to retain electronic assets on behalf of their clients for months, but the discussion has suddenly become much trickier. Many SEC registrants that hold cryptocurrency assets for their clients are required to report that risk as a liability on their financial statements according to SEC Staff Accounting Bulletin No. 121, which was released in March. A swarm of discussions between regulators and banks has resulted from that.
It will be challenging for regulators to provide clarification to banks until that SEC roadblock is overcome, according to experts. Despite what banks claim to be broad effects, bank authorities have largely stated that they are currently assessing SAB No. 121’s effects.
Despite declining to offer further information, Federal Reserve Chairman Jerome Powell suggested last week that bank authorities are addressing the problem.
“I don’t have an answer for you. But that’s certainly something we’re focusing on very closely right now.”Powell said in response to a question from Sen. Cynthia Lummis, R-Wyo., on how banking regulators are dealing with SAB No. 121.
Neither the Federal Reserve nor the Office of the Comptroller of the Currency would comment.
“The FDIC is working closely with the other banking agencies to better understand the risks associated with custodial arrangements involving crypto assets. As part of this process, we are assessing SEC’s Staff Accounting Bulletin 121 (SAB 121), including its applicability and potential impact on the financial reporting and regulatory capital requirements of banking organizations that engage in custodial activities covered by the bulletin.”A FDIC spokesperson said in a statement.
Banks, on the other hand, claim that the policy would essentially bar them from the market from offering bitcoin custody services because of how supervisory authorities balance out financial assets on their balance sheets. Many banks would find it unprofitable to provide crypto custodial if those digital assets are listed as liabilities on the balance sheets of the banks.
The SEC may have released its bulletin with little participation from banking regulators, according to communications from finance companies to lawmakers and regulators, which adds another element to the story.
“It would have been nice if they would have gone to the participants and asked their opinions before they issued this, but there was a limited amount of that if any at all. The rule just seems to have been made in a bit of a vacuum.”aid Jimmie Lenz, the director of the financial technology master’s program at Duke University’s Pratt School of Engineering.
Administrative advisories are not normally used to make significant policy decisions because they are not susceptible to the same notification processes that more written rules are.
“I’ve never seen something this significant come out of something that’s usually pretty bureaucratic in terms of staff bulletins. I think there’s a real question here about whether this is an appropriate way to make policy, especially policy that’s going to have a really big impact on the ability of banks to provide a service that is increasingly important and increasingly relevant.”Gabriel Rosenberg, a partner at the law firm Davis Polk focuses on fintechs and crypto.
The SEC accounting bulletin was met with swift opposition by banks, and ever since, they have been in discussions with authorities, including the SEC. Trade associations that speak for the banking sector have requested that the agency postpone the bulletin’s implementation.
“We believe investors and customers, and ultimately the financial system, will be worse off if regulated banking organizations are effectively precluded from providing crypto-asset safeguarding services, accepting crypto-assets as collateral, or conducting tokenized asset activities, as it would limit progress in relation to improved efficiencies across the financial system, as well as limit the market to providers that do not afford their customers the legal and supervisory protections that apply to federally regulated banking organizations.”The American Bankers Association, Bank Policy Institute, and Securities Industry and Financial Markets Association said in a letter to the Treasury Department and banking regulators last week.
Following up on discussions between the trade associations and the market regulator, ABA and SIFMA wrote another letter to the SEC on Monday in which they argued that banks might be a better option for handling cryptocurrency custody due to their stronger consumer protections and controls than less governed contemporaries.
“While banking organizations today generally do not offer crypto-asset custody services at scale, they are involved in many areas of financial innovation involving decentralized ledger technology, including the development of safeguarding solutions for crypto-assets. Banking organizations, subject to comprehensive safety and soundness and prudential regulation, historically have adapted controls and practices to evolve with technology, the financial markets and their customers’ resulting demands, and have provided custody and other services for a range of asset classes, from paper certificates in vaults, to records in computer databases, to tokenized assets.”ABA & SIFMA
Lenz stated that bitcoin exchanges are the only other alternative for custody for cryptocurrency buyers. The SEC accounting bulletin that is currently in effect is encouraging these less regulated organizations to provide bitcoin custody services in place of banks, which might eventually be detrimental to customers.
“Is that what you’re trying to facilitate at the end of the day? Cryptocurrency exchanges are highly unregulated, and I would think you would want to facilitate more regulated entities being involved in this type of asset class.”Lenz
Banks that focus on cryptocurrencies anticipate additional possible repercussions of the policy. Georgia Quinn, chief counsel of the cryptocurrency-focused bank Anchorage Digital, stated that there are still outstanding questions regarding how banks would handle cryptocurrency that has been securitized in consideration of the advisory.
“If I take crypto as collateral, am I going to have to reserve against that? That’s already reserving against another liability, so now I’m in this infinite loop of reserving against assets that are already providing collateral and reserving against another asset.”Quinn
The digital assets bank will not presently anticipate that SAB No. 121 will have much of an influence on it because of the way Anchorage is set up.
“We’re kind of a different animal than a typical depository institution. It really would be crazy to apply this to us.”Quinn
Regarding the next steps for banking regulators, Rosenberg noted that depending on how much of a significant influence the policymakers want the new regulation to have, there are still buttons for them to push.
The quantity that banks would need to retain in reserve may change if regulators, for instance, decided to attribute relatively minimal risk to crypto assets stored for clients.
“But this is really sort of being done outside of the banking regulators’ ability to make changes about it. The banking regulators will have to proactively do something in order for this increase in capital requirements to not occur.”Rosenburg
Information from American Banker