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On March 10th, 2023, The Hill published an op-ed by ATR Federal Affairs Manager Bryan Bashur. The piece discusses the Biden administration’s new digital asset custody rules. 

The article begins by stating that the Biden administration is cracking down on digital asset exposure throughout the financial markets. The Securities and Exchange Commission (SEC) published Staff Accounting Bulletin No. 121 (SAB 121) which requires banks and non-banks that perform custodial services to place digital assets on their balance sheets. As the op-ed explains: 

The conventional method of accounting keeps custodied assets off a financial institution’s balance sheet. Now, custodians would have to hold a commensurate asset on-balance sheet “at initial recognition” and “at the same time,” the digital asset is custodied. According to a letter written by Sen. Cynthia Lummis (R-Wyo.) and Rep. Patrick McHenry (R-N.C.) this “would trigger a massive capital charge” for credit unions, banks and “other financial institutions.” 

The piece goes on to explain that this new accounting method could impede banks from being able to service assets under custody. The SEC’s on-balance sheet requirement for custodied digital assets will increase costs for banks and likely result in increased costs for consumers. 

The article next explains that this capital crunch will not just apply to big banks but also to small community banks and de novo banks: 

Rural communities that rely on these banks could see more capital collecting dust than being put to work. Restricting this capital at the same time the Federal Reserve is continuing to increase interest rates would only exacerbate the eventual reduction in consumer spending and potential recessionary period. 

Next, the op-ed lays out how the SEC is restructuring the market for all custodied assets. In fact, the SEC admits that the enhanced scope of “assets subject to the proposed rule could create costs for those advisers (and their clients) with custody of crypto assets.” As the piece explains: 

The significant compliance costs in the rule, such as additional written assurances and stricter legal liability for negligence, could push custodians out of the market, reduce competition and make it incredibly more expensive for registered investment advisors (RIAs) to find a qualified custodian to safeguard pension fund assets owned by state employees. 

The article concludes by showing that the new digital asset custody rules are yet more examples of the SEC unilaterally expanding its own authority beyond its statutory mandate. The SEC should scrap these rules before they harm consumers, and Congress should take the reins to ensure the nation’s financial regulators “draft rules that promote the usage of custody services without imposing unnecessary compliance costs on financial institutions and the owners of custodied assets, which in many cases are retirees.” 

Click here to read the full op-ed.