As a seasoned crypto investor and observer of the financial landscape for over two decades, I find myself both intrigued and disheartened by the SEC’s persistence in maintaining its strict stance on crypto custody rules for banks. The ongoing saga between the regulators and the banking industry is reminiscent of a game of chess, with each move met by a countermove, creating an intricate dance that has lasted for years.
The United States Securities and Exchange Commission (SEC) has reiterated its strict stance on cryptocurrency storage regulations for banks, as stated by SEC Chief Accountant Paul Munter on September 9, 2024. His remarks have caused unease within the banking sector, as they confirmed that the principles outlined in Staff Accounting Bulletin No. 121 (SAB 121) are still being upheld.
Munter emphasized that financial institutions managing cryptocurrencies for clients should categorize these digital assets as liabilities on their financial statements, unless there are specific exceptions. The Securities and Exchange Commission (SEC) has maintained this stance, as detailed in SAB 121. This regulation, which was initially implemented in March 2022, remains a topic of ongoing political discussion.
SEC Rule Limits Bank Crypto Custody
One significant response was shared by Nate Geraci, president of ETF Store, on X (previously known as Twitter), on September 10, 2024, where he expressed:
They are not keen on granting regulated financial entities the authority to hold cryptocurrencies under regulatory oversight.
Commissioner Hester Peirce, a frequent critic of the rule, shared similar concerns on X, emphasizing that she remains uncertain about the rule’s content and the way it was implemented – SAB 121. On the other hand, the US House of Representatives voted to rescind this SEC guidance in May, but President Biden vetoed the repeal in June 2024, maintaining the rule’s validity.
The SEC team has reinforced their stance on SAB 121, yet they’ve also outlined some scenarios they believe fall outside of its purview. Despite my ongoing apprehensions about the substance and procedure of SAB 121, I am eager to hear your insights. Please feel free to share them at CommissionerPeirce@sec.gov regarding this matter.
— Hester Peirce (@HesterPeirce) September 9, 2024
The SEC’s stance significantly impacts financial institutions considering offering crypto custody services. While some exceptions exist, such as for broker-dealers who don’t control the cryptographic keys or bank holding companies with bankruptcy protections, the rule imposes notable regulatory challenges.
Crypto Custody Risks Remain High
The SEC’s firm approach stems from the perceived risks associated with safeguarding cryptographic keys. Under SAB 121, assets held in custody by banks must be listed as both assets and liabilities, which creates substantial balance sheet implications, particularly for banks. This regulation sharply contrasts with the handling of conventional assets, which do not require such accounting adjustments.
Regardless of attempts by diverse financial and political entities to overturn it, this regulation continues to serve as a significant barrier for banks aiming to offer crypto-related services. The Securities and Exchange Commission’s conservative stance might create broader industry repercussions, possibly dissuading traditional financial institutions from fully adopting digital assets within their care.
Looking forward, there might be increasing political pressure due to the banking sector’s ongoing efforts to modify or even reverse the stringent cryptocurrency custody rules set by the SEC. At present, however, it appears that the agency is firmly entrenched, showing no clear indication of policy adjustment in the near future.
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2024-09-10 13:33