WASHINGTON — A bipartisan group of lawmakers led by Rep. Andy Barr, R-Ky., is urging banking regulators to weigh in on a proposal by the Securities and Exchange Commission's to extend its custody rules for investment advisors to cryptocurrencies — a plan which some critics say would at minimum upend custody banking.
The proposal, issued in February, would violate the jurisdiction of bank regulators, the lawmakers wrote in a letter obtained by American Banker to three agency heads: Federal Reserve Chairman Jerome Powell, Federal Deposit Insurance Corp. Chairman Martin Gruenberg and acting Comptroller of the Currency Michael Hsu.
Barr, the chairman of the House Financial Services Committee's financial institutions subcommittee, has been critical of federal regulators lately. He has railed against the Fed's Basel III endgame plan and is a longtime critic of the Consumer Financial Protection Bureau. His views on such matters trend closely to those of the committee's chairman, Rep. Patrick McHenry, R-N.C.
Reps. Ann Wagner, R-Ohio, Bill Foster, D-Ill., and Brad Sherman, D-Calif., — who are also highly engaged on banking issues — signed the letter in addition to Barr.
The SEC's proposal would have "implications for banking organizations' treatment of deposits, their lending decisions, and certain payment arrangements," the lawmakers wrote.
Their letter singled out the proposal's requirement that qualified custodians such as banks segregate clients' cash from their digital-asset holdings. The proposal is a reaction to the rapid growth of the cryptocurrency and stablecoin industries, as well as questions about the cryptocurrency exchange FTX's handling of money that backed digital assets before it collapsed.
"As you know, banks today generally do not segregate client cash or establish 'special accounts' to hold client cash deposits," the letter said. "Deposits are an unsecured liability of the bank. Depositors have historically been protected by an extensive prudential regulatory and supervisory framework."
The letter asked banking regulators how the requirements would affect the quality and accessibility of banking services, what protections for client deposits exist under the current regulatory framework and whether the SEC consulted banking regulators in writing its plan.
The letter questioned whether the proposal would prioritize the claims of investment adviser clients and other specialized players over those of general depositors or even the FDIC in the event of a bank failure. It also asked how the proposal would affect payouts to depositors or the funds available to the FDIC as receiver should a bank fail.
The proposal would "require bank custodians to assume a greater degree of liability" for sub-custodian and central securities depositories, which the custodian bank might not be able to control, the letter said.
"Deposit-taking, custody and safekeeping are among the oldest and most well-established banking activities," the lawmakers wrote. "Supervision and regulation of a bank's balance sheet and risk is the fundamental obligation of the banking regulators. Given the proposed rule's interplay with banking regulations which would alter aspects of the banking system, we request your response to these questions and strongly encourage you to engage with the commission, as necessary, to mitigate conflicts with prudential banking regulations and avoid unintended consequences for consumers and the broader banking system."
