Major US banking groups seek SEC rule change to participate in Bitcoin ETF market
Several US banking groups are pushing for inclusion in the Bitcoin exchange-traded funds (ETFs) landscape and have requested a rule change to facilitate their participation.
In a Feb. 14 letter to SEC Chair Gary Gensler, a coalition consisting of the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association, and the Financial Services Forum expressed their support for this initiative.
Crypto custodial
The coalition urged the SEC to review a regulation that made it costly for traditional banks to offer crypto custody services. The current rules require these financial institutions to classify cryptocurrencies as liabilities on their balance sheets and allocate assets equivalent to the crypto holdings to mitigate potential losses and comply with strict regulatory capital requirements.
The coalition argued that this rule hindered them from acting as custodians for the newly introduced Bitcoin ETFs, a role they commonly undertook for most other Exchange-Traded Products (ETPs). This limitation, the group explained, was due to factors such as the “Tier 1 capital ratio and other reserve and capital requirements.”
They further stated:
“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 group also emphasized the need to mitigate the concentration risk of a single non-bank entity dominating the custodial services for these Bitcoin ETFs. According to the group, allowing prudentially regulated banks to offer custodial services for SEC-regulated ETFs, akin to qualified non-bank asset custodians, could address this concern.
The letter did not explicitly name Coinbase, the largest US-based crypto trading platform, but it referred to the unnamed non-bank entity that serves as the asset custodian for 8 of the ETF issuers.
Recommendations
The group urged the SEC to refine the definition of crypto outlined in Staff Accounting Bulletin 121 (SAB 121) to exclude traditional financial assets recorded or transferred on blockchain networks.
“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,” they added.
Additionally, they proposed exempting banks from the on-balance sheet requirements while upholding disclosure obligations. This approach would enable banks to partake in select crypto activities while maintaining transparency for investors.
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