BNY Mellon’s entry into the digital asset custody business has encountered a regulatory obstacle, as reported by American Banker. The Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121) mandates custodians of digital assets to include these assets on their balance sheets. This regulatory requirement poses a potential challenge for banks seeking to expand their digital asset custody services, particularly those specializing in trust services such as BNY Mellon.
BNY Mellon initiated its digital asset custody venture in October 2022. However, the regulatory roadblock presented by SAB 121 was only discovered after the bank had made significant progress in establishing its crypto custody business. BNY Mellon’s approach involved treating digital assets similarly to traditional assets, which are not recorded on its balance sheet. In its application to the New York State Department of Financial Services, the bank expressed its intention to support its Digital Assets Custody product by adhering to U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Under these standards, digital assets held by a custodian are not reported on the balance sheet, with only fiat currency balances needing to be reported.
However, the SEC’s stance on the matter has sent shockwaves throughout the banking industry, potentially discouraging other banks, including JPMorgan and Goldman Sachs, who have shown interest in cryptocurrency developments, from expanding into crypto custody.
Lee Reiners, a lecturer at Duke Law and the Duke Financial Economics Center, highlights that the leverage ratio would have a significant impact on banks, as they would be required to hold capital against digital assets. This could influence their decisions regarding offering crypto custody services. The crux of the issue lies in determining whether crypto assets are fundamentally similar to traditional assets.
John Sedunov, an associate professor of finance at Villanova University’s School of Business, asserts that crypto assets entail higher technological and operational risks compared to traditional assets. For instance, if a cryptocurrency is stolen or hacked, it may be irretrievably lost, unlike most conventional assets in custody. While crypto and traditional assets may not carry the same risks, there is a valid argument for treating them differently.