A top official with the Securities and Exchange Commission this week outlined a scenario in which a bank would not be bound by the restrictions of the SEC’s Staff Accounting Bulletin 121, which changed the way banks and other publicly traded entities were expected to account for digital assets held in custody.
In a speech at an accounting conference, SEC Chief Accountant Paul Munter said the agency was contacted by a bank about its obligations for cryptoassets safeguarded by the institution. The bank provided several facts to support its argument that it had sufficiently mitigated the “unique risks and uncertainties” present in its arrangements to safeguard cryptoassets, he said. As a result, “it should not recognize a liability on its balance sheet for an obligation to safeguard cryptoassets.” Those facts include:
- The bank obtained written approval from its prudential regulator at the state level for its proposed cryptoasset safeguarding activities. It also engaged with its primary federal prudential regulator.
- The bank will hold its institutional customers’ cryptoassets in a bankruptcy-remote manner. Each customer’s cryptoassets will be held in a blockchain wallet for which the customer is the beneficial owner. This wallet is segregated from wallets that hold cryptoassets for other customers or the entity, and from other assets.
- The bank obtained a legal opinion from outside counsel supporting its “bankruptcy-remote” conclusion that, in the event of insolvency, the cryptoassets should not be the property of the bank receivership estate and should not be available for distribution by the FDIC as receiver to the bank’s creditors.
- The bank negotiated with its institutional customers the contractual terms and conditions to be included in its cryptoasset safeguarding agreements that set forth the standard of care for which the bank will be responsible for exercising and the scope of its liability.
- The entity stated that it has a robust process for assessing regulatory, legal and technological risks and uncertainties on an ongoing basis specific to each particular cryptoasset.
Munter added that the bank will provide disclosure in its SEC filings about the extent of cryptoassets safeguarded and the relevant risk factors and effects on risk management, as well as the significant judgments made in reaching its accounting policy conclusion.
While this demonstrates a path forward to not incur the SAB 121 safeguarding liability, Jonathan Wiggins, deputy chief accountant at the SEC, cautioned using the fact pattern broadly. Regulated banking entities looking to conclude that a safeguarding liability is not necessary for custodied digital assets should consider consulting SEC prior to concluding on their accounting, he said.
