During a Senate hearing today, the Chair of the Securities and Exchange Commission (SEC), Gary Gensler, was quizzed about an SEC staff accounting bulletin relating to cryptocurrencies. Banks have treated this accounting rule as impacting bank capital requirements. Gensler said it is purely for accounting purposes and is up to banking regulators to decide on bank capital requirements.
The crypto accounting rule and Basel rules
Staff Accounting Bulletin No. 121 was published in March 2022, and states that cryptocurrency should be disclosed as both an asset and a liability. Other assets held under custody are not shown within the balance sheet.
As Senator Lummis noted, the Federal Reserve Chair Jerome Powell previously acknowledged that the SEC balance sheet treatment of crypto is not the norm.
Separately, new Basel Committee rules require banks that hold cryptocurrencies to set aside additional capital. In the United States, that is the equivalent of a dollar for every dollar of crypto that the bank holds. However, the Basel rules expressly state that it would not usually apply to crypto held in custody.
Because the SEC requires the crypto to appear on the balance sheet, U.S. banks have interpreted that the Basel rule for crypto custody has been overriden. Gensler implied that was not the SEC’s intent.
Gensler says its only for crypto accounting
Senator Lummis observed the rule “prevents the most heavily regulated financial institutions from offering custody. So if your ultimate goal is to provide real consumer protection, shouldn’t the SEC withdraw Staff Accounting Bulleting 121 to allow banks to provide custody.”
Here’s Gensler’s response. “The Staff Accounting Bulleting is just about public companies and how to properly show that to investors in those banks.”
He continued, “The bank regulators are free to address how they wish to treat capital. But this is just about – the balance sheet has those custodied crypto as a liability, but they also have the crypto as an asset. We don’t speak to how it’s backed. That’s up to the bank regulators.”
In March, Senator Lummis and Representative McHenry sent a letter to the SEC on this exact point. At the time, we noted that these should be two separate issues – one for SEC accounting. And the other for bank regulators and capital requirements. It’s unfortunate it’s taken another six months to get more clarity.