Lawmakers raise concerns about balance sheet treatment of crypto custody assets

Rep. Patrick McHenry (R-N.C.) and Sen. Cynthia Lummis (R-Wyo.) this week asked the banking agencies for clarification regarding an April 2022 staff accounting bulletin issued by the Securities and Exchange Commission. The bulletin, SAB 121, made changes to the way publicly traded entities, including banks, are expected to account for the safeguarding of digital assets held in custody. The bulletin directs companies to recognize a liability and a corresponding asset on their balance sheets, measured at the fair value of the custodied digital assets—a departure from previous long-standing practice regarding custodial assets for banks and other financial institutions.

“Since SAB 121 purports to require banks, credit unions and other financial institutions to effectively place digital assets on their balance sheets, it would trigger a massive capital charge,” the lawmakers pointed out. “This in turn is likely to prevent these prudentially regulated entities from engaging in digital asset custody. To the contrary, we should be encouraging prudentially regulated financial institutions, like banks and credit unions, to provide digital asset services precisely because they are subject to the highest standards of capital, liquidity, recovery and resolution, custody, cyber-security, and risk management.”

McHenry and Lummis asked regulators to respond by March 16 regarding their engagement with SEC staff on the issuance of the bulletin, and whether they plan to direct banks and other supervised institutions to comply with the bulletin, among other things.