The Bank of New York Mellon’s (BNY Mellon) foray into digital asset custody has per regulatory hurdle American banker.
As it turned out, the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121) requires digital asset custodians to include these assets on their balance sheets. This regulatory requirement is a potential barrier to banks looking to scale their digital asset custody business, especially banks that specialize in trust services like BNY Mellon.
BNY Mellon began his digital asset custody venture in October 2022. However, the SAB 121 regulatory roadblock was only identified after the bank made significant progress in establishing its crypto custody business.
BNY Mellon’s approach has been to treat digital assets the same way as more traditional off-balance sheet assets.
In its filing with the New York State Department of Financial Services, the bank stated 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 which digital assets are held by a custodian are not reported on the balance sheet and only associated fiat currency balances must be reported.
However, the SEC’s stance on the issue has created ripples in the banking industry, potentially deterring other banks looking to expand into crypto custody, including JPMorgan and Goldman Sachs, interested in cryptocurrency developments.
According to Lee Reiners, a Duke Law and lecturer at the Duke Financial Economics Center, the main impact for banks would be the leverage ratio as they would need to hold capital against digital assets. This may affect their decisions about providing crypto custody services.
The crux of the claim lies in whether crypto-assets are fundamentally similar to traditional assets.
John Sedunov, an associate professor of finance at Villanova University in the School of Business, said crypto assets carry higher technological, operational risks than traditional assets. For example, a stolen or hacked cryptocurrency can be irretrievably lost, unlike most conventional assets in custody.
Therefore, while crypto and traditional assets may not carry the same risks, there is a valid case for treating them differently.
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