BNY, the world’s largest custody bank, told Bloomberg that the SEC confirmed it can provide cryptocurrency custody for asset managers issuing exchange traded products (ETPs) without including those assets on the BNY balance sheet.
In 2022 the Security and Exchange Commission (SEC) published staff accounting bulletin (SAB) 121, which said listed firms had to include crypto under custody on the custodian’s balance sheet. That’s unheard of given the assets do not belong to the custodian. For banks it’s prohibitive because of regulatory rules relating to their balance sheets.
This is the reason why no banks provide custody for the $50 billion of U.S. Bitcoin ETFs and the more recent Ether ETFs. Given BNY has almost $50 trillion in assets under custody, it has more battle hardened security and a larger security budget compared to crypto firms.
However, despite the ETP custody green light, BNY still has to approach the SEC’s Office of the Chief Accountant (OFA) on a case by case basis. Hence, this “does not solve the issue of SAB 121 effectively restricting bank custody of digital assets,” BNY said, adding that it “will similarly engage with the OCA on additional use cases through the OCA’s ‘facts and circumstances’ process, as appropriate.”
Imagine doing a sales pitch in which the caveat is always “we have to check with our regulator”. It makes it trickier to get the client to sign on the dotted line.
House Representatives have another go at SAB 121
Both the House and Senate already overturned SAB 121, but President Biden used his veto.
Yesterday the House Financial Services Committee made another run at the topic. In a statement, several representatives said “SAB 121 upends bank custody rules for digital assets, weakens consumer protections, and stifles financial innovation. The lawmakers are seeking insight into discussions between the agencies regarding SAB 121 to assess whether the SEC undermined banking regulators with this siloed regulatory action, which would risk introducing unnecessary uncertainty and instability into our financial system.”
Four Republican Committee members penned letters to the Federal Reserve, FDIC, OCC and Chair Gensler at the SEC asking about the inter agency communication on the topic of SAB 121. The legislators believe the banking regulators spent time on an interagency statement on crypto custody services but were pre-empted by the release of SAB 121.
“It is imperative to ensure that no agency undermines another agency through siloed regulatory actions, which risks introducing uncertainty and instability into our financial system,” they wrote in the letters.
A Committee hearing yesterday with all five SEC Commissioners spent considerable time on the SEC’s regulation by enforcement approach to digital assets.
