Banks petition SEC for crypto custodianship role amid Bitcoin ETF surge

Major banking institutions in the United States are lobbying the Securities and Exchange Commission (SEC) to reevaluate its crypto asset definition, aiming to secure a more prominent role in the burgeoning cryptocurrency market. This push comes after the recent approval of spot Bitcoin exchange-traded funds (ETFs), which notably excluded American banks as asset custodians.

Banking industry advocacy for regulatory adjustment

A coalition comprising the Bank Policy Institute, American Bankers Association, Financial Services Forum, and Securities Industry and Financial Markets Association has penned a letter to SEC Chair Gary Gensler, emphasizing the absence of U.S. banks as custodians for the approved Bitcoin ETFs. The group urges the SEC to revise Staff Accounting Bulletin 121 (SAB 121), issued in March 2022, which governs the accounting treatment of crypto asset custody obligations.

The coalition suggests narrowing the definition of crypto assets outlined in SAB 121 to exclude traditional assets recorded on blockchain technology. This proposed change aims to prevent assets like tokenized deposits from falling under stringent crypto guidance. 

Moreover, the group advocates for exempting banks from the requirement to hold crypto assets on their balance sheets, which they argue is costly and impedes their ability to offer crypto custody services at scale. However, they stress the importance of maintaining disclosure requirements to ensure transparency for investors.

Market response and observations

Matt Hougan, Chief Investment Officer at Bitwise, interprets the coalition’s letter as indicative of a shift in Washington’s regulatory stance towards crypto assets, particularly in light of the approval of Bitcoin ETFs.

Meanwhile, Bloomberg ETF analyst Eric Balchunas notes that U.S. banks are interested in participating in the digital finance wave, evidenced by their efforts to secure roles in the crypto custodianship sphere. Additional commentary from industry insiders suggests growing frustration among bankers over their exclusion from facilitating spot Bitcoin ETFs for customers.

Despite the absence of U.S. banks as custodians, newly launched spot Bitcoin ETFs have seen substantial investor interest, with preliminary data from Farside indicating aggregate inflows surpassing $4 billion. This influx of funds into Bitcoin ETFs comes with an acceleration in outflows from Grayscale, a prominent digital currency asset manager.

The sector’s appeal to the SEC for reevaluating crypto asset regulations underscores the evolving landscape of digital finance and the increasing integration of traditional financial institutions into the crypto market. As stakeholders await regulatory decisions, the performance of Bitcoin ETFs and the broader cryptocurrency market will continue to be closely monitored by investors and industry observers alike.