WASHINGTON — An accounting bulletin from the Securities and Exchange Commission has complicated bank regulators’ plans to clarify how institutions should treat digital assets they hold in custody.
For months, banks have awaited their regulators’ promised guidance on how to hold virtual assets on behalf of clients — but that conversation has recently gotten a lot more tricky. SEC Staff Accounting Bulletin No. 121,
It’ll be difficult for regulators to move forward in giving banks clarity until that hurdle with the SEC is cleared, experts say. Despite what banks say are widespread consequences, bank regulators have mostly said they’re still analyzing the impact of SAB No. 121.
Federal Reserve Chairman Jerome Powell hinted last week that bank regulators are working on the issue, although he declined to provide more details.
“I don’t have an answer for you,” Powell said in response to a question from Sen. Cynthia Lummis, R-Wyo., on how banking regulators are dealing with SAB No. 121. “But that’s certainly something we’re focusing on very closely right now.”
The Fed and the Office of the Comptroller of the Currency declined to comment.
“The FDIC is working closely with the other banking agencies to better understand the risks associated with custodial arrangements involving crypto assets,” an FDIC spokesperson said in a statement. “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.”
Banks, meanwhile, have argued that the rule would effectively shut them out of the business of providing cryptocurrency custody services because of how prudential regulators tally how assets offset liabilities on their balance sheets. If those digital assets are on banks’ balance sheets as a liability, banks could have to reserve against those liabilities, making it uneconomical for many banks to offer crypto custody.
And as an added wrinkle, letters from banking groups to lawmakers and regulators suggest that the SEC issued its bulletin with little, if any, input from banking regulators.
“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,” said Jimmie Lenz, the director of the financial technology master’s program at Duke University’s Pratt School of Engineering. “The rule just seems to have been made in a bit of a vacuum.”
Staff bulletins aren’t subject to the same notice-and-comment procedures that more formal rules usually have, and because of that staff bulletins typically aren’t used to make substantive policy changes.
“I’ve never seen something this significant come out of something that’s usually pretty bureaucratic in terms of staff bulletins,” said Gabriel Rosenberg, a partner at the law firm Davis Polk who focuses on fintechs and crypto. “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.”
Banks immediately pushed back on the SEC accounting bulletin, and have been in talks with regulators, including the SEC, ever since. Trade groups representing the banking industry have asked the agency to delay the implementation of the bulletin.
“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
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“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,” the letter says. “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.”
The only other custody option for crypto buyers is cryptocurrency exchanges, Lenz said. The current SEC accounting bulletin is incentivizing those kinds of less-regulated entities to offer cryptocurrency custody services, rather than banks, a situation that ultimately could be worse for consumers.
“Is that what you’re trying to facilitate at the end of the day?” he said. “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.”
Banks that specialize in cryptocurrency see further potential consequences of the rule. Georgia Quinn, general counsel of Anchorage Digital, a crypto-focused bank, said that there are unanswered questions about how banks would deal with crypto that’s been given as collateral in light of the bulletin.
“If I take crypto as collateral, am I going to have to reserve against that?” she said. “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.”
Because of Anchorage’s structure, the digital assets bank doesn’t currently believe it’ll see much impact from SAB No. 121.
“We’re kind of a different animal than a typical depository institution,” Quinn said. “It really would be crazy to apply this to us.”
As for banking regulators’ next moves, Rosenberg said that there are still levers for them to pull based on how much of a capital impact the regulators want the rule change to have.
Regulators could, for example, decide to assign very little risk to crypto assets held for clients, which would impact the amount that banks would need to hold in reserve.
“But this is really sort of being done outside of the banking regulators' ability to make changes about it,” he said. “The banking regulators will have to proactively do something in order for this increase in capital requirements to not occur.”
