According to more than half a dozen people with knowledge of the matter, the banks’ cryptocurrency projects have been developed by accounting guidance from the US Securities and Exchange Commission (SEC), which is too much for lenders to hold crypto tokens on behalf of customers. will be capital-intensive. ,
Several lenders including US Bancorp, Goldman Sachs Group Inc., JPMorgan Chase & Company, BNY Mellon, Wells Fargo & Co, Deutsche Bank, BNP Paribas and State Street Corp are working on crypto products and services for clients. Tap into the $1 trillion crypto market, according to his public statements and media reports.
But on March 31, the SEC said that public companies that hold crypto assets on behalf of customers or others must be accounted for as liabilities on their balance sheets because of their technical, legal and regulatory risks.
While the guidance applies to all public companies, it is particularly problematic for banks because their strict capital rules, which are overseen by bank regulators, require them to hold cash against balance sheet liabilities. According to four people, the SEC did not consult banking regulators when issuing the guidance.
The SEC’s move complicates banks’ efforts to jump on the digital asset bandwagon, and could keep them on edge, even as they report increased demand from customers looking to access the growing market.
“This has thrown a big wrench into the mix,” said one of the sources. Lenders making crypto offerings “have had to stop going ahead with plans that are pending pending any further action from the SEC and banking regulatory agencies,” he said.
Custody banks State Street and BNY Mellon, which are building digital asset offerings, are among those whose projects have been disrupted, according to three people with knowledge of the matter.
State Street Digital head Nadine Chakar said, although accounting guidance does not prevent State Street from offering crypto custody services, it would make it unconstitutional to do so. “We have a problem on the basis of doing this, because these are not our assets. It shouldn’t be on our balance sheet,” Chakar said.
A spokesperson for BNY Mellon declined to comment on the status of its crypto custody project. “BNY Mellon believes that digital assets are here to stay, and are fast becoming a part of the mainstream of finance,” he said.
When asked about SEC guidance, a US Bancorp spokesperson said it is still serving existing customers for which it offers bitcoin custody services. “However, we are stopping intake of additional customers to this service as we evaluate the evolving regulatory environment.”
An executive at a European bank looking to launch crypto custody services said it would now be extremely costly for a bank to do so in the United States due to SEC guidance.
Spokesmen for the SEC and other banks declined to comment.
The problems the SEC guidance is causing for banks that have not previously been reported face widespread challenges in trying to capitalize on the growing crypto market amid ongoing regulatory confusion and skepticism.
“We have heard from a variety of stakeholders, among them banks, how challenging this new Staff Accounting Bulletin will be for them to enter the crypto assets holding space,” said US Representative Trey Hollingsworth. SEC Chairman Gary Gensler said in an interview in July expressing concerns about the guidance in a letter.
“This order came down to dialogue with the industry, without guidance, without input, without feedback.”
Financial institutions were eager to capitalize as the cryptocurrency market rallied in 2020. Despite the considerable contraction in the crypto market this year, lenders still see an opportunity for their services.
Offering clients to hold digital assets is the most secure way to enter the market. Banks typically offer custody for a variety of financial instruments and are generally not required to reflect them on their balance sheets, unless they are accompanied by the bank’s own assets.
SEC guidance departed from that practice. At a conference last week, the SEC’s acting chief accountant said that detained crypto assets present a “unique” risk that meets the definition of liability under US accounting standards.
In a June letter to bank regulators, however, the Securities Industry and Financial Markets Association, the American Bankers Association and the Bank Policy Institute said such risks are already mitigated by tighter bank supervision and regulations.
Taking into account international Basel capital regulations employed, the guidance could lead to more than $1 of capital spent for every $1 digital asset, the groups estimate, meaning that crypto custody will be “effectively prohibited.”
Sources said the SEC guidance also applies where lenders outsource the custody function to a third party, such as Anchorage Digital.
Diogo Monica, president of Anchorage Digital, said the capital cost was “totally unaffordable” and that “every single bank” Anchorage works with is now awaiting regulators before working with Anchorage on crypto custody solutions.
According to four sources and industry papers, industry groups are lobbying the SEC to take banks out of guidance, although the agency appears unheard, one of them said. Some lenders, instead, are seeking personal exemptions, the two people said.
The industry is also lobbying banking regulators to issue guidance that would neutralize the capital impact of the SEC guidance, although changing capital regulations would be a major undertaking that looks impossible in the short term, the people said.
The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. declined to comment.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)