Banks push regulators to change crypto accounting

Powerful interest groups are pushing the Securities and Exchange Commission to tweak accounting guidance that makes it more expensive for U.S. banks to hold digital assets for their customers. 

The regulator is already facing pressure from both Democrats and Republicans in Congress to repeal the guidance. 

The trade group coalition, which includes the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association, and Financial Services Forum, issued a letter to the SEC on Wednesday seeking certain changes. 

The existing guidance directs public companies, including banks, to count crypto they custody as liabilities on their corporate balance sheets. That means banks have to set aside assets worth a similar amount to protect against losses to comply with their capital requirements. 

The groups have asked the SEC for the following key changes:

• To exclude certain assets from what counts under the broad crypto umbrella. This includes any traditional assets recorded or transferred using blockchain networks — for instance, tokenized deposits — as well as any tokens underlying SEC-approved products, like spot-Bitcoin exchange traded funds.
• To exempt regulated lenders from the current balance sheet requirement while maintaining the requirement that firms disclose their crypto activities in financial statements.

Chris Ratcliffe/Bloomberg

"If regulated banking organizations are effectively precluded from providing digital asset safeguarding services at scale, investors and customers, and ultimately the financial system, will be worse off," the trade groups said in the letter. 

The regulator has said its accounting guidance is necessary because cryptoassets pose unique risks and uncertainties compared to other assets banks hold for clients. In an interview, on Wednesday, SEC Chair Gary Gensler described the crypto industry as lacking in appropriate and required disclosures related to securities.  

'Chilling effect' 

The guidance in question — known as Staff Accounting Bulletin No. 121 — has drawn pushback from banks since it was published in 2022. Lenders have said the bulletin effectively restricts them from scaling up services to hold digital assets on behalf of customers by making it too costly.  

As a result, banks have been unable to crack into the crypto custodian business and recently missed out on providing that service for the newly-approved Bitcoin ETFs — an issue the trade groups raised in their letter. A majority of those ETF issuers picked Coinbase Global Inc. as their crypto custodian, with the rest using BitGo, Gemini or in the case of Fidelity, an in-house custody solution. 

The trade groups also pointed to other challenges they've faced because of the guidance, including a "chilling effect" on plans to use blockchain, or distributed ledger, technology for traditional assets. 

On Thursday, a spokesperson for the SEC described SAB 121 as "non-binding staff guidance" that, if followed, "enhances important disclosure to investors in firms that safeguard crypto assets for others."

Bank of New York Mellon Corp., which launched a digital asset custody platform in 2022 for select clients, reported "de minimis" impact from the product on its revenues or assets as of the end of 2023, according to a filing. 

State Street Corp., which has plans to launch a crypto custody platform pending regulatory approval, cut some jobs in its digital-assets division recently, Bloomberg reported earlier. Jay Biancamano, State Street's former head of tokenization, said in a LinkedIn post in January that the team's focus on digital custody and tokenization was "well ahead of their time." In the post, he added: "unfortunately the ebbs and flows of digital innovation are hard to predict." 

Push to repeal

The requests made in the Wednesday letter seek to find a path forward with the SEC, at a time when some U.S. lawmakers are ramping up calls to repeal the bulletin outright. The idea has gained traction on Capitol Hill over the last several months following a report from the Government Accountability Office that concluded the SEC guidance amounted to a "rule" subject to congressional review. 

Earlier this month, Reps. Mike Flood, a Republican from Nebraska, and Wiley Nickel, a Democrat from North Carolina, introduced a resolution to repeal the SEC's guidance and said that the regulator had overstepped its authority. Cynthia Lummis, a Wyoming Republican, sponsored identical legislation in the Senate. 

"The SEC should not be making rules that affect bank custody," Flood said in an interview this week. "That's a job for our prudential regulators." 

Donna Milrod, State Street's chief product officer and head of State Street Digital, said in a statement that while the lender is encouraged by Congress's efforts, it was critical for the SEC to work collectively alongside banks and accounting firms to "at minimum, properly modify SAB 121 to remove the balance sheet treatment for prudentially regulated banks." 

BNY Mellon declined to comment. In a previous public comment to the SEC last year, the lender recommended that banks be exempt from the on-balance sheet requirements.  

The Republican-led House Financial Services Committee could vote on the repeal measure as soon as this month, according to several people familiar with the matter. In the Senate, Lummis is trying to garner the 30 member signatures needed for a discharge petition, which would allow the legislation to skip a committee vote and set the stage for a floor vote, the people said. 

But even if the measures make it that far, it's unclear if there will be enough support — particularly among Democrats and within the White House — for the legislation to become law.