According to over half a dozen people who are familiar with the matter, U.S. Securities and Exchange Commission accounting guidance has rescinded banks’ cryptocurrency projects. This would make it too capital intensive for lenders to hold crypto tokens for clients.
According to media reports and public statements, a number of lenders, including U.S. Bancorp and Goldman Sachs Group Inc. JPMorgan Chase & Co. JNY Mellon. Wells Fargo & Co. Deutsche Bank, BNP paribas and State Street Corp, offer or are currently working on crypto products for clients to tap into the $1 trillion crypto market.
However, the SEC stated that public companies holding crypto assets for clients or other parties must account them as liabilities in their balance sheets owing to their regulatory, technological and legal risks.
SEC guidance proves problematic for banks
The guidance is applicable to all public companies but it is particularly problematic for banks, whose strict capital rules require them to keep cash to cover balance sheet liabilities. Four people claim that the SEC didn’t consult banks regulators before issuing the guidance.
The SEC’s decision could complicate banks’ attempts to get on board the digital asset bandwagon and could keep them off the sidelines, even though they report higher demand from clients wanting to access this burgeoning market.
One source said that “this has thrown a wrench in the mix.” They said that lenders who are developing crypto offerings had to “stop moving forward with these plans pending any type of further action by the SEC or the banking regulatory agencies.”
According to three sources familiar with the matter, projects of custodian banks State Street (and BNY Mellon) that were involved in digital asset offerings have been disrupted.
State Street can still offer crypto custody services. However, the accounting guidance would not prevent them from doing so, according to Nadine Chakar of State Street Digital. “We have a problem with the idea of doing this, as these are not our assets. Chakar stated that this should not be on the balance sheet.
BNY Mellon spokesperson declined to comment on status of crypto custody project. He said that BNY Mellon believes digital assets will be around for the long-term and are increasingly part of mainstream finance.
Bancorp cointunes to offer bitcoin services
A spokesperson for U.S. Bancorp said that it continues to serve existing clients and offer bitcoin custody services. “We are halting intake of new clients in this service while we assess the evolving regulatory environment.”
A European bank executive who wanted to launch crypto custody services stated that it would be too expensive for them to do so in the United States because of the SEC guidance.
Spokespeople from the SEC and other banks declined to comment.
Banks are facing problems that the SEC guidance has not yet been reported on, which highlights the wider challenges banks face when trying to capitalize on the growing crypto market in the midst of ongoing regulatory confusion and skepticism.
We have heard from many stakeholders, including banks, about how difficult this new staff accounting bulletin would make it for them to be in the space of custodying cryptocurrency assets,” Trey Hollingsworth, a U.S. Representative, stated in an interview. He had written Gary Gensler in July, expressing concern over the guidance.
“This edict was passed without any guidance, input or feedback and without having had any conversation with the industry.”
Financial institutions were eager to cash out as the cryptocurrency market exploded in 2020. Lenders still see a market for their services, despite the fact that the crypto market has contracted significantly in 2019.
Banks way into crypto was to hold crypto for clients
The best way to get into the market was to offer to hold digital assets of clients. Banks often offer custody for a range of financial instruments. They are not required to show them on their balance sheets unless they are commingled or incorporated with bank assets.
This practice was not followed by the SEC guidance. The SEC’s acting chief accounting officer stated that crypto assets held in custodial custody present “unique” risk which meets the definition of liability under U.S. accounting standards.
However, in a June letter to regulators, the Securities Industry and Financial Markets Association and American Bankers Association stated that such risks have been already mitigated by strict banking supervision and rules.
The groups estimated that crypto custody would be illegal if the international Basel capital rules are included.
Sources said that the SEC guidance may also apply when lenders outsource custody functions to third parties like Anchorage Digital.
Anchorage Digital president Diogo Monica stated that the capital cost was “completely insupportable” and that Anchorage is currently waiting for regulators to determine if it can continue working with Anchorage on crypto custody options.
According to four sources and industry letters, industry groups have been lobbying SEC to remove banks from the guidance. However, the agency seems unpersuaded, one source said. Two people claimed that some lenders are instead seeking individual exemptions.
Industry is lobbying banks regulators to issue guidance that would neutralize capital impacts of the SEC guidance. However, changing capital rules would be a significant undertaking and seems unlikely in the short-term, people stated.
Federal Reserve, the Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp declined comment.