At the end of March, we reported that new SEC crypto custody accounting rules would make the service unattractive for banks because it might be prohibitively expensive. The in-depth explanation is here. Today Reuters cites an insider source as saying that indeed it has “thrown a huge wrench in the mix” making some banks rethink custody projects.
With conventional assets, if a bank provides custody services, the assets do not appear on the bank’s balance sheet because it’s not their assets. The SEC’s March guidance said that because of the risks involved in safeguarding crypto keys, the assets under custody should be treated as both an asset and liability of a company providing custody services. Given the net balance is zero, that doesn’t seem a big deal.
However, that impacts banks because they must comply with Basel III rules based on a bank’s balance sheet. These rules increase the amount of low risk capital that has to be held by a bank which carries a cost, and Basel rules give a maximum risk rating to cryptocurrencies.
State Street Digital’s Nadine Chakar told Reuters, “We do have an issue with the premise of doing that, because these are not our assets. This should not be on our balance sheet,” said Chakar. Bancorp told Reuters it is pausing taking on new customers.
SIFMA and the American Bankers Association wrote to the SEC, arguing that stringent banking regulatory and supervisory frameworks mitigate these risks.