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Banks Feel FOMO As SEC Rules Keep Them Away From Crypto Custody
Good Friday. Earlier this week, I dropped by the Milken Institute’s elegant annual conference in Los Angeles, where I met Donna Milrod, State Street’s head of production. She has an extraordinary knowledge of the history of Wall Street and, in particular, of the custodial business: the brazen but vital task of holding clients’ assets and keeping them safe. Milrod made that clear too Highwaywhich is the second oldest bank in the United States, is eager to get into the cryptocurrency game.
“We can’t wait to get going,” Milrod told me, explaining why his bank, which is the largest custodian in the world, would be the best and safest choice to safeguard the billions of dollars of Bitcoin held by the big players financial. Pleases Black rock. Unfortunately, when the SEC granted approval to BlackRock and 10 others to launch Bitcoin ETFs in January, State Street was on the outside looking in, instead it was the cryptocurrency incumbent Coinbase which was given the custodianship of all but one of the new funds.
The reason State Street isn’t playing the custody game is – stop me if you’ve heard this before – unusual regulatory choices by the SEC. Specifically, the agency has issued guidelines that, for accounting purposes, companies must list cryptocurrencies held on behalf of others as both assets and liabilities on their balance sheets. You don’t have to be an accountant to realize there’s something fishy about all this, especially since non-crypto assets held in trust don’t go on the balance sheet at all. One former State Street executive even went this far to describe the rule like “crazy”.
The frustration is understandable. Although the accounting rule implies that holding cryptocurrencies is a failure (since the assets and liabilities offset each other), for banks it is a problem since the capital cushions they must hold are determined by the size of their balance sheet. It’s another example of Gary Gensler’s SEC attempting to restrict cryptocurrencies by any means necessary, even if that means playing fast and loose with the letter of the law.
While these types of tactics are keeping companies like State Street out of cryptocurrencies for now, it appears the SEC is fighting a losing battle. Banks are rapidly adopting blockchain technology and it is only a matter of time before elements of cryptocurrencies are integrated into all parts of the financial system. Meanwhile, cryptocurrency advocates are dismantling Gensler’s regulatory stonewalling in the courts and Congress. This week, for example, the House passed a bill to eliminate the SEC’s wacky interpretation of custody (known as SAB 121) with the support of 21 Democrats, whose median age is almost half that of the party leader. It’s a matter of time.
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If you’re in New York this week and interested in the rapidly evolving world of finance, I’ll be chairing the Fortune Future of Finance: Technology and Transformation Summit at the Park Hyatt next Thursday. The event will be attended by senior executives from companies ranging from BlackRock to PayPal at Coinbase and will host a special dinner on finance and the 2024 elections with Anthony Scaramucci and Andrew Yang. There are some tickets left – you can find out more here. Good weekend.
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
This story was originally featured on Fortune.com