US banking groups are marking a potential turning point in the world of cryptocurrencies and financial investments. In a bold move, they recently applied to the US Securities and Exchange Commission (SEC) for a regulatory change that would allow them to provide custody services for newly launched Bitcoin exchange-traded funds (ETFs).
A plea for innovation
On February 14, a coalition comprising the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association and the Financial Services Forum took up the pen to express their position. They called on the SEC to reconsider regulations that make it costly for traditional banks to offer crypto custody services. Under current rules, these financial institutions are forced to classify cryptocurrencies as liabilities on their balance sheets, forcing them to allocate equivalent assets to crypto holdings to mitigate potential losses and meet stringent regulatory capital requirements.
This constraint prevents banks from acting as custodians for Bitcoin ETFs, a role they routinely play for most other exchange-traded products (ETPs). The coalition argues that this limitation stems from a variety of factors, including the Tier 1 capital ratio and other reserve and capital requirements.
Custody issues
The group points out that if regulated banking organizations are effectively prevented from providing digital asset safekeeping services on a large scale, investors, customers and, ultimately, the financial system will be at a disadvantage. This would limit the market to custody providers who do not provide their customers with the legal and supervisory protections offered by federally regulated banking organizations.
The issue is also to reduce the risk of concentration that would be implied by the domination of a single non-bank entity over custody services for these Bitcoin ETFs. Allowing prudentially regulated banks to offer custody services for SEC-regulated ETFs, in the same way as qualified non-bank asset custodians, could address this concern.
Recommendations and outlook
The coalition urged the SEC to refine the definition of crypto as outlined in Staff Accounting Bulletin 121 (SAB 121) to exclude traditional financial assets recorded or transferred on blockchain networks. In addition, it proposes to exempt banks from accounting requirements while maintaining disclosure obligations. This approach would allow banks to participate in certain crypto activities while ensuring transparency for investors.
The initiative by US banking groups could mark the beginning of a new era in cryptocurrency investment, where regulatory innovation aligns with the aspirations of investors and traditional financial institutions. The outcome of this application could not only shape the future of financial services, but also pave the way for wider adoption of cryptocurrencies in the traditional banking sector.
