The US Securities and Exchange Commission (SEC) has reaffirmed its strict stance regarding bank crypto custody regulations.
Concerns within the banking sector were raised on September 9, 2024, when SEC Chief Accountant Paul Munter stated that the agency’s position, as outlined in Staff Accounting Bulletin No. 121 (SAB 121), remained the same.
According to Munter, unless there are specific exclusions, banks that hold cryptocurrency assets on behalf of their clients are required to report these assets as liabilities on their balance sheets. The SEC’s stance has not changed, as stated in SAB 121. Since its initial introduction in March 2022, this regulation has generated political controversy.
Limiting Bank Crypto Custody
SEC claims that an entity that is a bank holding company recently asked the staff’s opinion on the accounting for its responsibilities inside a regulated bank subsidiary (the “Bank”) to protect crypto-assets for institutional clients alone.
This request stemmed from the entity’s recent accounting consultation. The bank possessed the cryptographic private key information necessary to access the cryptoassets it was protecting in this particular fact pattern.
In SAB 121, the staff’s opinions are still the same: unless there are certain exceptions, an organization should record a liability on its balance sheet to reflect its commitment to protect crypto assets held for others.
According to the SEC, this kind of financial reporting gives investors the pertinent and timely information they need to evaluate the particular risks and uncertainties involved in protecting other people’s cryptocurrency holdings.
The staff has lately addressed certain fact patterns regarding crypto-assets and distributed ledger technology that should have been taken into consideration by SAB 121, as the SEC underlined.
X users react
Nate Geraci, the president of ETF Store, had one of the most noteworthy responses when he spoke on X (formerly Twitter) on September 10, 2024. Hester Peirce, the SEC Commissioner and a strong opponent of the regulation repeated similar worries on X, saying she remains uneasy with both the content and procedure of SAB 121.
The SEC advice was set to be repealed by the US House of Representatives in May 2024, but President Biden vetoed the bill, preserving the regulation. The SEC’s position has a big influence on financial companies thinking about providing crypto custody services. The law presents significant regulatory hurdles, notwithstanding certain exclusions, such as for bank-holding corporations that are protected by bankruptcy or broker-dealers that do not own cryptographic keys.
The SEC’s strict stance is a result of the dangers they believe cryptographic key storage poses. SAB 121 requires assets kept in banks’ custody to be reported as both assets and liabilities, which has significant effects on balance sheets, especially for banks. The way traditional assets are handled, which is exempt from this law, calls for different accounting adjustments.
This regulation continues to be a major barrier for banks looking to offer crypto-related services, even in the face of challenges from a number of political and financial organizations.
The financial sector as a whole may be impacted by the SEC’s cautious attitude, which would deter traditional banks from accepting digital assets into their custody to the fullest extent possible.
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