Major Regulatory Agencies Urge Caution on Crypto Custody
The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency have issued a joint statement warning banks about the risks associated with handling cryptocurrency assets. While this statement does not introduce new regulations for crypto custody, it represents a significant shift in federal government engagement on this issue—marking a departure from previous administrations.
Regulatory Guidance for Banks
The joint statement reiterates existing risk management principles applicable to the custody of crypto assets and reminds financial institutions of their duty to comply with relevant laws and regulations. It clarifies that banks can offer safekeeping services for crypto, either in a fiduciary or non-fiduciary capacity.
The statement emphasizes legal and compliance risks related to cryptocurrencies, particularly concerning anti-money laundering (AML) and the Bank Secrecy Act. Institutions are advised to carefully assess operational, legal, and technological risks before introducing any crypto-related services. The regulators also stress the importance of employee training, requiring personnel involved in crypto asset safekeeping to possess adequate knowledge and understanding of associated risks and requirements.
Repeal of SAB 121
The joint statement also marks the rollback of the Staff Accounting Bulletin (SAB) 121, which had previously restricted financial institutions from holding crypto directly. The rule necessitated that banks maintaining custody of cryptocurrencies record such holdings on their balance sheets.
SAB 121 was originally intended as guidance under existing accounting standards but faced criticism for perceived regulatory overreach. Senator Cynthia Lummis, a key supporter of cryptocurrency, described it as a rule under the Administrative Procedure Act, disguised as an accounting guidance.”
ETFs Raise Key Issues
Despite SAB 121’s restrictions, banks continued to offer crypto custody services. By mid-2024, U.S. banks collectively held nearly $16 billion in digital assets. The introduction of exchange-traded funds (ETFs) in early 2024 further highlighted the need for clearer regulatory frameworks. SAB 121’s restriction on direct holding led to a concentration of assets among a small number of institutions, prompting calls for more lenient regulation.
In response, the Senate voted last year, albeit with bipartisan support, to overturn the rule. While President Biden opposed the new regulation, SAB 121 was eventually rescinded shortly after President Trump’s inauguration. Following this, the SEC published SAB 122, instructing institutions to assess and record potential risks associated with crypto custody as a contingent liability on their balance sheets.