The Bank of New York Mellon (BNY Mellon) has encountered a setback in its digital asset custody business due to a regulatory hurdle. 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 requirement poses a potential obstacle for banks, especially those specializing in trust services like BNY Mellon, that aim to expand their digital asset custody business.
BNY Mellon ventured into the digital asset custody space in October 2022, unaware of the regulatory roadblock posed by SAB 121. The bank had made significant progress in establishing its crypto custody business before discovering this hurdle. Initially, BNY Mellon treated digital assets similarly to traditional ones, which do not appear on its balance sheet.
In its application to the New York State Department of Financial Services, BNY Mellon expressed its intention to comply with U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). According to these standards, digital assets held by a custodian are not reported on the balance sheet, with only fiat currency balances requiring reporting.
However, the SEC’s stance on the matter has sent shockwaves throughout the banking industry, potentially discouraging other banks, including JPMorgan and Goldman Sachs, from expanding into crypto custody. These banks have a vested interest in cryptocurrency developments but may reconsider their plans due to the regulatory implications.
Lee Reiners, a lecturer at Duke Law and the Duke Financial Economics Center, highlights the significant impact on banks in terms of leverage ratio. Banks would be required to hold capital against digital assets, which could influence their decisions regarding offering crypto custody services.
The core of the issue lies in the question of whether crypto assets are fundamentally similar to traditional assets. John Sedunov, an associate professor of finance at Villanova University, suggests that crypto assets pose higher technological and operational risks compared to traditional assets. For example, if a cryptocurrency is stolen or hacked, it may be irretrievably lost, unlike most conventional assets held in custody.
Therefore, while crypto and traditional assets may not share the same level of risk, there is a valid argument for treating them differently. The regulatory requirement imposed by SAB 121 forces banks to reassess their approach to digital asset custody and consider the unique characteristics and risks associated with cryptocurrencies.
BNY Mellon’s digital asset custody venture has encountered a regulatory hurdle in the form of SEC’s SAB 121. This requirement to include digital assets on balance sheets presents challenges for banks, particularly those specializing in trust services. The impact on leverage ratio and the need to hold capital against digital assets may influence banks’ decisions regarding crypto custody services. The differences in risk and characteristics between crypto and traditional assets further contribute to the ongoing debate on how to approach digital asset custody within the banking industry.