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The SEC has opened a path for banks and brokerages to avoid reporting their customers’ crypto holdings on their balance sheets, provided they mitigate associated risks. This change responds to industry pressures and unsuccessful challenges to the SEC’s two-year-old guidance in Congress as per a Bloomberg report.
SEC’s change of heart is evident due to the election year and the US expects pro-crypto governance.
Here’s the insight to the story.
In a recent change, the SEC has allowed some financial institutions to avoid reporting customer crypto holdings on their balance sheets if they meet certain conditions, despite the controversial Staff Accounting Bulletin No. 121 (SAB 121) issued in March 2022.
Guidance on Bypassing Balance Sheet Reporting
The best part is that the SEC staff have advised that certain arrangements might not require liabilities to be reported on the balance sheet. This follows consultations with large banks since 2023, allowing them to bypass reporting by ensuring customer assets are protected in case of bankruptcy or failure.
Impact on Crypto Services
In simple terms, current accounting rules require companies to record cryptocurrencies as long-term intangible assets. These assets are listed on the balance sheet at their original purchase cost and must be regularly checked for any decrease in value.
Since several crypto firms filed for bankruptcy in 2022, companies have sought guidance on crypto-related policies. They needed to prove they could protect customer assets similarly to traditional assets.
However, the SEC’s adjusted stance could expand the range of companies offering crypto services. Previously, accounting treatments prevented banks from entering the crypto market because their larger balance sheets triggered capital requirements.
Legislative Efforts
Since the controversy started, Congress attempted to overturn SAB 121, with mixed support. The House and Senate voted to reverse it, but President Biden vetoed the resolution. Despite this, the SEC continues to work with the industry to refine the guidance.
Industry Reactions
Fox Journalist Eleanor Terrett questioned whether this move indicates the SEC’s recognition of the need to relax SAB 121 requirements for banks and brokerages. She also speculated that it might be a reaction to Congress’s campaign for change. The SEC initially issued this guidance to inform investors about technological and legal risks after events like the FTX collapse.
What Next?
Financial institutions have successfully argued for the exclusion of certain crypto products from the guidance’s scope. With the approval of spot Bitcoin products, traditional financial institutions are eager to engage in the crypto industry, a sentiment echoed by industry experts like Aaron Jacob from TaxBit.