US SEC coding guidelines raise costs for lenders, disrupting projects

US SEC coding guidelines raise costs for lenders, disrupting projects

Written by Hannah Lang and Michelle Price

WASHINGTON (Reuters) – Bank crypto projects have been turned upside down by U.S. Securities and Exchange Commission (SEC) accounting guidelines that would make it capital-intensive for lenders to hold crypto tokens on behalf of clients, according to more than six people. Knowing it.

A large number of lenders including US Bancorp, Goldman Sachs Group Inc (NYSE :), JPMorgan Chase & Co (NYSE :), BNY Mellon (NYSE :), Wells Fargo (NYSE ๐Ÿ™‚ & Co, German Bank (ETR :), BNP Paribas (OTC :), and State Street Corp (NYSE:) provides or works on crypto products and services to customers in an effort to take advantage of 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 should count them as liabilities on their balance sheets due to their technological, legal and regulatory risks.

While the directive applies to all public companies, it is particularly problematic for banks because strict capital rules, which are overseen by bank regulators, require them to hold cash against balance sheet obligations. The Securities and Exchange Commission (SEC) did not consult banking regulators when issuing 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 while reporting increased demand from customers looking to access the booming market.

“This threw a big wrench into the mix,” one source said. They added that lenders building crypto offerings had to “stop moving forward with those plans pending any kind of additional action from the SEC and banking regulators.”

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Custodial banks State Street and BNY Mellon, which is building digital asset offerings, are among those whose projects have been stalled, according to three people familiar with the matter.

Nadine Chakar, president of State Street Digital, said that while the accounting guidance does not prevent State Street from providing cryptocurrency custody services, it would make it uneconomic to do so. “We have a problem with the premise of doing this, because these are not our assets. This should not be on our balance sheet,” Shukr said.

A BNY Mellon spokesperson declined to comment on the status of the crypto custody project. He added, โ€œBNY Mellon believes digital assets are here to stay, and are increasingly becoming a part of mainstream finance.โ€

When asked about the SEC’s guidance, a spokesperson for Bancorp in the US said that it is still serving existing clients for whom it offers bitcoin custody services. “However, we are temporarily discontinuing the acceptance of additional customers for this service while we assess the evolving regulatory environment.”

An executive at a European bank looking to launch crypto-custodial services said it would now be too expensive for a bank to do so in the US due to SEC guidance.

Spokesmen for the Securities and Exchange Commission and other banks declined to comment.

The issues caused by the SEC’s guidance to banks, which have not been previously reported, highlight the broader challenges lenders face in trying to capitalize on the growing cryptocurrency market amid ongoing regulatory confusion and uncertainty.

โ€œWe have heard from a wide range of stakeholders, including banks, about how difficult this new employee accounting circular is for them to be able to enter the crypto-asset custody space,โ€ US Representative Trey Hollingsworth, who sent SEC President Gary said. Gensler, in a letter in July expressing concern about mentoring, in an interview.

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โ€œThis decree was issued without guidance, without input, without comment, without having a conversation with the industry.โ€

The death penalty?

With the cryptocurrency market ballooning in 2020, financial institutions were eager to make money. Even though the cryptocurrency market has shrunk significantly this year, lenders still see an opportunity for their services.

Offering to hold digital assets to clients appears to be the safest way to enter the market. Banks usually give custody of a variety of financial instruments and are generally not required to reflect them on their balance sheet, unless they are mixed with the bank’s own assets.

Securities and Exchange Commission guidelines departed from this practice. At a conference last week, the SECโ€™s acting chief accountant said that crypto assets held represent โ€œuniqueโ€ risks that meet the definition of liability under US accounting standards.

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 have already been mitigated through strict banking supervision and rules.

Taking into account the planned International Capital Rules of Basel, the guidance could cost more than $1 of capital for every $1 of digital assets held, the groups estimate, meaning that cryptocurrency holding โ€œwould be effectively prohibited.โ€

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

Diogo Mรณnica, president of Anchorage Digital, said the cost of capital is โ€œcompletely unsustainableโ€ and that โ€œevery bankโ€ working with Anchorage is now waiting for regulators before embarking on working with Anchorage on crypto custody solutions.

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Industry groups have been pressing the Securities and Exchange Commission to remove the banks from the guidance, according to four of the sources and industry letters, although the agency appears unconvinced, one of those people said. Instead, some lenders are seeking individual waivers, two people said.

People said the industry is also pressing banking regulators to issue guidelines that would neutralize the capital impact of the SEC’s guidance, although changing capital rules would be a major task that seems unlikely in the short term.

The Federal Reserve and the Comptroller’s Office of the Federal Reserve Currency and Deposit Insurance Corporation declined to comment.

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