The Securities and Exchange Commission has rescinded a contentious accounting regulation that mandated companies to classify crypto assets held on behalf of customers as liabilities on their balance sheets. This decision could pave the way for more conventional banks to venture into the crypto custody sector.
The recent rescission of Staff Accounting Bulletin 121 signifies a pivotal moment that may transform the strategies of financial institutions regarding crypto custody. This change could prompt consolidation within the industry and broaden the scope of institutional crypto services to include more than just Bitcoin and Ethereum.
Major custodians, including USBank and BNY, offer fund administration and cash custody services for cryptocurrency exchange-traded funds (ETFs). According to Steven McClurg, CEO and founder of Canary Capital, BNY possesses the technical capability to custody Bitcoin and Ethereum, as reported by etf.com.
The elimination of SAB 121 could pave the way for traditional custody providers to broaden their crypto ETF offerings on a global scale, according to McClurg. He also anticipates a wave of industry consolidation, with crypto-native firms such as Gemini or Anchorage possibly facing acquisition by banking institutions.
McClurg emphasised that the transition is not expected to occur rapidly. Initially, many banks are expected to restrict their custody services to Bitcoin and Ethereum. As a result, the upcoming wave of potential crypto ETFs, which may include assets like XRP, Litecoin, and HBAR, are unlikely to receive bank custody support at their inception.
In a recent discussion, McClurg highlighted that although certain ETF issuers may transition their current products to bank custody services for ease of use, it remains a lengthy process for most banks to gain confidence in their technological infrastructures. However, mergers and acquisitions could accelerate this timeline.
A recent regulatory update in Staff Accounting Bulletin 122 mandates that companies evaluate their crypto-safeguarding responsibilities by broader accounting frameworks, including U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards guidelines.
The updated guidance will be implemented for fiscal years after December 15, 2024, although companies can adopt the changes sooner. The SEC has reiterated the importance of firms maintaining transparency in their disclosures regarding crypto custody obligations and adhering to current regulatory requirements.
A shift has occurred in response to multiple congressional efforts to tackle the accounting requirement. Last year, a bipartisan effort to repeal SAB 121 garnered initial backing in both legislative chambers, yet it ultimately faced a veto from then-President Joe Biden.