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U.S. banks are urging the U.S. Securities and Exchange Commission (SEC) to amend its controversial Staff Accounting Bulletin 121 (SAB 121) after being excluded from serving as asset custodians for spot Bitcoin exchange-traded funds (ETFs), according to a February 14 letter from a coalition of trade groups to the regulator.
SAB 121 Faces Criticism from U.S. Banks
The coalition, comprising the American Bankers Association, the Financial Services Forum, the Bank Policy Institute, and the Securities Industry and Financial Markets Association, argued that the guidance established by SAB 121, which prevents banks from being listed as asset custodians for spot Bitcoin ETFs, may raise “important questions about the safety and stability of this ecosystem.”
“We believe that this result could raise concentration risk, as one nonbank entity now serves as the custodian for the majority of these ETPs,” the letter stated. “That risk can be mitigated if prudentially regulated banking organizations have the same ability to provide custodial services for Commission regulated ETPs as qualified nonbank asset custodians.”
Should the SEC Redefine Crypto Assets?
Equally significant, the trade group coalition requested that the SEC modify its definition of what constitutes a crypto asset, which could exclude certain use cases such as spot Bitcoin ETFs and tokenized deposits if approved.
“SAB 121 makes no distinction between asset types and use cases, but instead generally states that crypto assets pose certain technological, legal, and regulatory risks requiring on-balance sheet treatment,” the letter continued. “However, there are significant differences between a cryptocurrency like Bitcoin that exists on a public, permissionless network versus a traditional financial instrument that is recorded on a blockchain network where access is controlled and transactions can be cancelled, corrected, or amended.”
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US banks, left off key bitcoin ETF roles, are pushing SEC to tweak guidance around holding digital assets. A bank trade gp coalition sent SEC letter asking them exclude ETFs from broad crypto umbrella. They want a piece of the action. I don’t blame them, it isn’t fair… pic.twitter.com/advPa94nK2
— Eric Balchunas (@EricBalchunas) February 15, 2024
Following the publication of the letter, several key figures in the crypto space shared their opinions on X.
“If you were wondering if bitcoin ETFs were going to change the tone around crypto regulation in Washington, here’s your answer,” Bitwise CEO Matt Hougan tweeted.
“They want a piece of the action,” Bloomberg Senior ETF analyst Eric Balchunas posted on X. “I don’t blame them, it isn’t fair.”
“The Financial System Will Be Worse Off” Without U.S. Banks
If the SEC acts on the letter’s demands, U.S. banks would play a larger role in the overall management of digital assets.
“If regulated banking organizations are effectively precluded from providing digital asset safeguarding services at scale, investors and customers, and ultimately the financial system, will be worse off, with the market limited to custody providers that do not afford their customers the legal and supervisory protections provided by federally regulated banking organizations,” the letter stated.
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