US banking groups lobby SEC for rule change to enter Bitcoin ETF market

Multiple US banking groups are seeking inclusion in the Bitcoin exchange-traded funds (ETFs) landscape, prompting a request for a rule change to facilitate their participation.

In a Feb. 14 letter to SEC Chair Gary Gensler, a coalition comprising the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association, and the Financial Services Forum advocated their stance.

Crypto custodial

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, the banks must allocate assets equivalent to the crypto holdings to mitigate potential losses and adhere to the strict regulatory capital requirements.

The coalition contended that this rule hampered 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 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 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 further 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.

Coinbase, the largest US-based crypto trading platform, is the unnamed non-bank entity mentioned in the letter. The exchange 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.