Multiple US banking groups are seeking inclusion in the Bitcoin Exchange-Traded Funds (ETFs) landscape, prompting calls for a rule change to facilitate their participation.
In a Feb. 14 letter to SEC Chairman Gary Gensler, a coalition including the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association and the Financial Services Forum made their case.
Crypto Custody
The coalition urged the SEC to reassess a regulation that made it expensive for traditional banks to offer crypto custody services. Current rules require these financial institutions to classify cryptocurrencies as liabilities on their balance sheets. Therefore, banks must allocate assets equivalent to crypto holdings to limit potential losses and adhere to strict regulatory capital requirements.
The coalition claimed that this rule prevented them from acting as managers of the newly launched Bitcoin ETFs, a role they typically took on for most other Exchange-Traded Products (ETPs). This limitation, the group argued, stemmed from factors such as the “Tier 1 capital ratio and other reserve and capital requirements.”
They added:
“If regulated banking organizations are effectively excluded from offering digital asset protection services at scale, investors and customers, and ultimately the financial system, will be worse off, with the market limited to custody providers who do not provide their customers with the legal and provide supervisory protections offered by federally regulated banking organizations.”
The group further emphasized the need to limit the concentration risk of a single non-bank entity dominating the custody services for these Bitcoin ETFs. According to the group, allowing prudentially regulated banks to provide custodial services for SEC-regulated ETFs, similar to qualified non-bank asset custodians, could eliminate this concern.
Coinbase, the largest US-based crypto trading platform, is the unnamed non-bank entity mentioned in the letter. The exchange acts as an asset custodian for eight of the ETF issuers.
Recommendations
The group urged the SEC to refine the definition of crypto set forth in Staff Accounting Bulletin 121 (SAB 121) to exclude traditional financial assets recorded or transferred on blockchain networks.
“SAB 121 does not distinguish between asset types and use cases, but instead states generally that crypto assets pose certain technological, legal and regulatory risks that require on-balance sheet treatment,” she added.
In addition, they proposed exempting banks from balance sheet requirements while maintaining disclosure requirements. This approach would allow banks to participate in select crypto activities while maintaining transparency for investors.
