As cryptocurrency prices continue to soar, reaching a total market capitalization of $1.93 trillion on Thursday, influential interest groups are calling on the US Securities and Exchange Commission (SEC) to revise its accounting guidance. This guidance imposes higher costs on US banks for holding digital assets on behalf of their customers.
In response, a coalition of trade groups, including the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association, and the Financial Services Forum, sent a letter to the SEC on Wednesday outlining their desired changes. They argue that the current guidance requires public companies, including banks, to treat cryptocurrencies they hold in custody as liabilities on their corporate balance sheets. This means that banks must allocate assets of a similar value to comply with capital requirements and protect against potential losses.
The trade groups have requested the SEC to consider two key changes. First, they want certain assets to be excluded from being classified under the broad crypto umbrella, such as traditional assets recorded or transferred using blockchain networks and tokens underlying SEC-approved products like spot Bitcoin exchange-traded funds (ETFs). Second, they are seeking an exemption for regulated lenders from the current balance sheet requirement, while still maintaining disclosure of their crypto activities in financial statements.
The trade groups argue that if regulated banking organizations are unable to provide digital asset-safeguarding services at scale, it would negatively impact investors, customers, and the broader financial system. However, the SEC has defended its accounting guidance, citing the “unique risks” and uncertainties posed by cryptocurrencies compared to other assets held by banks.
This specific guidance, known as Staff Accounting Bulletin No. 121, has faced criticism from banks since its publication in 2022. Lenders argue that it limits their ability to expand digital asset services for customers due to the associated high costs. As a result, banks have missed out on providing custody services for recently approved Bitcoin exchange-traded funds, with Coinbase emerging as the preferred custodian for the majority of ETF issuers.
The trade groups also highlight additional challenges resulting from the guidance, including a “chilling effect” on plans to utilize blockchain technology for traditional assets. While the SEC has described SAB 121 as non-binding staff guidance, it acknowledged that following it enhances disclosure to investors regarding firms safeguarding crypto assets for others.
As the SEC faces mounting pressure, there have been efforts by lawmakers to repeal the guidance. A resolution was introduced in the House Financial Services Committee, spearheaded by Representatives Mike Flood and Wiley Nickel, while Senator Cynthia Lummis sponsored identical legislation in the Senate. These measures aim to remove the SEC’s authority in making rules that impact bank custody. However, the success of this legislation depends on garnering sufficient support, particularly among Democrats and within the White House.
The collective efforts of trade groups, lawmakers, and industry stakeholders could potentially lead to regulatory changes that alleviate the burden on banks holding digital assets, facilitating their participation in the evolving cryptocurrency landscape. Furthermore, the recent endeavors undertaken by US institutions exemplify a growing interest and eagerness to adopt and invest in cryptocurrencies, particularly Bitcoin. This heightened institutional involvement has significantly contributed to the swift success of Bitcoin spot ETFs, which gained regulatory approval merely a month ago.
As shown in the daily chart, the total crypto market cap has been on a continuous uptrend. This exemplifies the growing interest and investment in cryptocurrencies. With this surge in interest and involvement, it is no surprise that influential interest groups are urging the SEC to revise its accounting guidance and make it more feasible for banks to provide digital asset services for their customers.
In summary, amidst the current surge in cryptocurrency prices, influential interest groups are pushing for changes in the SEC’s accounting guidance to make it more feasible for banks to hold digital assets on behalf of their customers. These changes could potentially have a significant impact on the evolving cryptocurrency landscape and facilitate the continued growth and adoption of cryptocurrencies.
