US SEC’s crypto guidelines raise costs for lenders, disrupting projects

WASHINGTON, Sept 16 (Reuters) – Banks’ cryptocurrency projects have been upstaged by U.S. Securities and Exchange Commission (SEC) accounting guidance that would make it too capital intensive for lenders to hold crypto tokens on behalf of clients, according to more than half a dozen people with knowledge of the matter.

A number of lenders including US Bancorp ( USB.N ), Goldman Sachs Group Inc., JPMorgan Chase & Co, BNY Mellon, Wells Fargo & Co, Deutsche Bank ( DBKGn.DE ), BNP Paribas ( BNPP.PA ) and State Street Corp . (STT.N) offers or works on crypto products and services for clients in an effort to tap into the $1 trillion crypto market, according to their public statements and media reports.

But on March 31, the SEC said that public companies that hold crypto assets on behalf of clients or others must account for them as liabilities on their balance sheets because of their technological, legal and regulatory risks. read more

While the guidance applies to all public companies, it is particularly problematic for banks because their strict capital rules, overseen by banking regulators, require them to hold cash against balance sheet liabilities. The SEC did not consult bank regulators when it issued the guidance, according to four of the people.

The SEC’s move complicates banks’ efforts to jump on the digital asset bandwagon, and could keep them on the sidelines even as they report increased demand from customers looking to access the burgeoning market.

“This has thrown a big wrench into the mix,” one of the sources said. Lenders building out crypto offerings have had to “stop moving forward with those plans pending any further action by the SEC and banking regulatory agencies,” they added.

Custodian banks State Street and BNY Mellon, which have built digital asset offerings, are among those whose projects have been disrupted, according to three people with knowledge of the matter.

While the accounting guidance does not stop State Street from offering crypto custody services, it would make it uneconomical, said Nadine Chakar, head of State Street Digital. “We have a problem with the premise of doing that, because these are not our assets. This should not be on our balance sheet,” Chakar said.

A spokesperson for BNY Mellon declined to comment on the status of its crypto depository project. “BNY Mellon believes that digital assets are here to stay and are increasingly becoming part of the mainstream of finance,” he added.

When asked about the SEC guidance, a spokesperson for US Bancorp said it continues to serve existing customers for whom it provides bitcoin custody services. “However, we are halting the intake of additional customers into this service while we evaluate the evolving regulatory environment.”

An executive at a European bank looking to launch crypto custody services said it would now be prohibitively expensive for the bank to do so in the US because of SEC guidance.

Spokesmen for the SEC and the other banks declined to comment.

The problems the SEC guidance causes for banks, which have not previously been reported, underscore the broader challenges lenders face as they try to capitalize on the growing crypto market amid ongoing regulatory confusion and skepticism.

“We have heard from a wide variety of stakeholders, among them banks, about how challenging this new staff accounting bulletin would be for them to be able to enter the crypto asset storage space,” sent US Representative Trey Hollingsworth. SEC Chairman Gary Gensler a letter in July expressing concern about the guidance, said in an interview.

“This edict came without guidance, without input, without feedback, without conversation with the industry.”

DEATH PENALTY?

As the cryptocurrency market exploded in 2020, financial institutions were eager to cash in. Despite the fact that the crypto market has shrunk significantly this year, lenders still see an opportunity for their services.

Offering customers’ digital assets appeared to be the safest way to enter the market. Banks usually provide custody for a range of financial instruments and have generally not been required to reflect them on the balance sheet, unless they are mixed with the bank’s own assets. read more

The SEC guidance departed from this practice. At a conference last week, the SEC’s acting chief accounting officer said that custodial cryptoassets pose “unique” risks that meet the definition of a liability under US accounting standards.

However, in a June letter to bank regulators, the Securities Industry and Financial Markets Association, the American Bankers Association and the Bank Policy Institute said such risks are already mitigated by strict banking supervision and rules.

Taking into account planned international Basel capital rules, the guidance could cost more than $1 of capital for every $1 of digital assets held, the groups estimated, meaning crypto custody would “effectively be banned.”

The SEC guidance also appears to apply where lenders outsource the custody function to a third party, such as Anchorage Digital, the sources said.

Diogo Mónica, president of Anchorage Digital, said the cost of capital was “completely unsupportable” and that “every single bank” that Anchorage works with is now waiting on regulators before continuing to work with Anchorage on crypto custody solutions.

Industry groups have lobbied the SEC to carve banks out of the guidance, according to four of the sources and industry letters, although the agency seems unconvinced, one of these people said. Some lenders are instead seeking individual exemptions, 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 rules would be a tall order that looks unlikely in the near term, the people said.

The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp declined to comment.

Reporting by Hannah Lang and Michelle Price in Washington Additional reporting by Pete Schroeder in Washington Editing by Matthew Lewis

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