The crypto custody business of BNY Mellon is challenged by the SEC’s accounting regulations.
According to American Banker, The Bank of New York Mellon (BNY Mellon) has met a regulatory obstacle in its custody of digital assets business. An issue for banks, especially those that specialize in trust services like BNY Mellon, is the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121) requirement that custodians of digital assets record those assets on their balance sheets.
BNY Mellon began operating in the digital asset custody market in October 2022, but it wasn’t until after making considerable strides toward establishing its cryptocurrency custody business that it learned of the legal challenge posed by SAB 121.
Digital assets were first treated by BNY Mellon in a similar manner to traditional assets, which are not included on its balance sheet. However, the bank and other organizations planning to grow into crypto custody, notably JPMorgan and Goldman Sachs, have expressed worries and potential difficulties over the SEC’s position, as detailed in SAB 121.
BNY Mellon stated in its application to the New York State Department of Financial Services that it intended to follow U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which only require the reporting of associated fiat currency balances and do not require the inclusion of digital assets held by a custodian on the balance sheet.
The banking industry has been shocked by the SEC’s stance on the issue, which has consequences for banks’ leverage ratios because they could need to keep capital against digital assets. This aspect might affect how they decide whether to provide cryptocurrency custody services.
The main topic of discussion is whether traditional assets and crypto assets are essentially identical. The leverage ratio and the capital requirements associated with digital assets are where banks will be most significantly impacted, according to Lee Reiners, a lecturer at Duke Law and the Duke Financial Economics Center. This factor might influence how they decide whether to offer crypto custody services.
John Sedunov, an associate professor of finance at Villanova University, contends that the operational and technological risks associated with crypto assets are greater than those associated with traditional assets. Cryptocurrencies that are stolen or hacked are irretrievably lost, setting them apart from the majority of traditional assets kept in custody.
The regulatory difficulties BNY Mellon encountered emphasize the complexity and dynamic nature of the custodial business for digital assets. The expansion of cryptocurrency custody services will be made possible by legislative clarity and conformity with accounting standards as the market expands and draws interest from big financial institutions.