As Bitcoin Rallies, Banks Are Pushing US Regulators To Allow Bitcoin Custody And ETF Products For Clients

Powerful interest groups are pushing the Securities and Exchange Commission to tweak accounting guidance that makes it more expensive for US banks to hold digital assets for their customers. As Bitcoin Rallies, Banks Are Pushing US Regulators To Allow Bitcoin Custody And ETF Products For Clients

* Letter Comes During Renewed Push In Congress To Repeal Rule

* SEC Wants Banks To Count Crypto Held For Clients As Liability

The regulator is already facing pressure from both Democrats and Republicans in Congress to repeal the guidance.

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The trade group coalition, which includes the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association, and Financial Services Forum, issued a letter to the SEC on Wednesday seeking certain changes.

The existing guidance directs public companies, including banks, to count crypto they custody as liabilities on their corporate balance sheets. That means banks have to set aside assets worth a similar amount to protect against losses to comply with their capital requirements.

The Groups Have Asked The SEC For The Following Key Changes:

* To exclude certain assets from what counts under the broad crypto umbrella. This includes any traditional assets recorded or transferred using blockchain networks — for instance, tokenized deposits — as well as any tokens underlying SEC-approved products, like spot-Bitcoin exchange traded funds.

* To exempt regulated lenders from the current balance sheet requirement while maintaining the requirement that firms disclose their crypto activities in financial statements.

“If regulated banking organizations are effectively precluded from providing digital asset safeguarding services at scale, investors and customers, and ultimately the financial system, will be worse off,” the trade groups said in the letter.

The regulator has said its accounting guidance is necessary because cryptoassets pose unique risks and uncertainties compared to other assets banks hold for clients.

In an interview with Bloomberg News on Wednesday, SEC Chair Gary Gensler described the crypto industry as lacking in appropriate and required disclosures related to securities.

‘Chilling Effect’

The guidance in question — known as staff accounting bulletin No. 121 — has drawn pushback from banks since it was published in 2022. Lenders have said the bulletin effectively restricts them from scaling up services to hold digital assets on behalf of customers by making it too costly.

As a result, banks have been unable to crack into the crypto custodian business and recently missed out on providing that service for the newly-approved Bitcoin ETFs — an issue the trade groups raised in their letter.

A majority of those ETF issuers picked Coinbase Global Inc. as their crypto custodian, with the rest using BitGo, Gemini or in the case of Fidelity, an in-house custody solution.

The trade groups also pointed to other challenges they’ve faced because of the guidance, including a “chilling effect” on plans to use blockchain, or distributed ledger, technology for traditional assets.

On Thursday, a spokesperson for the SEC described SAB 121 as “non-binding staff guidance” that, if followed, “enhances important disclosure to investors in firms that safeguard crypto assets for others.”

Bank of New York Mellon Corp., which launched a digital asset custody platform in 2022 for select clients, reported “de minimis” impact from the product on its revenues or assets as of the end of 2023, according to a filing.

State Street Corp., which has plans to launch a crypto custody platform pending regulatory approval, cut some jobs in its digital-assets division recently, Bloomberg reported

earlier. Jay Biancamano, State Street’s former head of tokenization, said in a LinkedIn post in January that the team’s focus on digital custody and tokenization was “well ahead of their time.” In the post, he added: “unfortunately the ebbs and flows of digital innovation are hard to predict.”

Push To Repeal

The requests made in the Wednesday letter seek to find a path forward with the SEC, at a time when some US lawmakers are ramping up calls to repeal the bulletin outright.

The idea has gained traction on Capitol Hill over the last several months following a report from the Government Accountability Office that concluded the SEC guidance amounted to a “rule” subject to congressional review.

Earlier this month, Reps. Mike Flood, a Republican from Nebraska, and Wiley Nickel, a Democrat from North Carolina, introduced a resolution to repeal the SEC’s guidance and said that the regulator had overstepped its authority.

Cynthia Lummis, a Wyoming Republican, sponsored identical legislation in the Senate.

“The SEC should not be making rules that affect bank custody,” Flood said in an interview this week. “That’s a job for our prudential regulators.”

Donna Milrod, State Street’s chief product officer and head of State Street Digital, said in a statement that while the lender is encouraged by Congress’s efforts, it was critical for the SEC to work collectively alongside banks and accounting firms to “at minimum, properly modify SAB 121 to remove the balance sheet treatment for prudentially regulated banks.”

BNY Mellon declined to comment. In a previous public comment to the SEC last year, the lender recommended that banks be exempt from the on-balance sheet requirements.

The Republican-led House Financial Services Committee could vote on the repeal measure as soon as this month, according to several people familiar with the matter.

In the Senate, Lummis is trying to garner the 30 member signatures needed for a discharge petition, which would allow the legislation to skip a committee vote and set the stage for a floor vote, the people said.

But even if the measures make it that far, it’s unclear if there will be enough support — particularly among Democrats and within the White House — for the legislation to become law.

Updated: 2-29-2024

US Lawmakers Advance Resolution To Get Banks In On Bitcoin Custody

The House Financial Services Committee has voted to advance a resolution that could overturn the controversial Staff Accounting Bulletin No. 121.

The United States House Financial Services Committee (HSFC) has voted in favor of a resolution that seeks to overturn a U.S. Securities and Exchange Commission guideline that has prevented banks from getting in on crypto custody.

In a Feb. 29 markup hearing, 31 HSFC members from both sides of the political aisle voted in favor of the resolution, with 20 members voting against it.

“By overturning SAB 121, the Resolution will ensure consumers are protected by removing roadblocks that prevent highly regulated banks from acting as custodians of digital assets,” said the House Financial Services Committee in a statement.

The SEC’s Staff Accounting Bulletin No. 121 — introduced in March 2022 — is a set of guidelines that requires institutions that custody crypto assets to record crypto holdings as liabilities on their balance sheets.

Republican Congressperson Mike Flood, the lawmaker who introduced the resolution, said that the SAB 121 was unfair for banks looking to custody crypto, as custodial assets are “always considered off-balance sheet,” which includes securities and digital assets, such as Bitcoin.

“The ramifications of requiring banks to hold these assets on-balance sheet are pretty significant.”

“If a bank were to custody digital assets according to the parameters of SAB 121, the on-balance sheet treatment would affect their other regulatory obligations like their capital and liquidity requirements,” Flood added.

The resolution was introduced on Feb. 1 by Flood and Democrat Representative Wiley Nickel, who said that SAB 121 went “beyond the scope of an accounting bulletin” and had effectively become a de facto law.

There is bipartisan agreement SAB 121 undermines consumer protection and leaves customers’ digital assets vulnerable.

I look forward to getting this measure across the finish line to overturn it.

Thanks to @USRepMikeFlood, @RepWileyNickel, and @SenLummis for your leadership. https://t.co/otlpBnnMWW

— Patrick McHenry (@PatrickMcHenry) February 1, 2024

Notably, the resolution still needs to pass a full floor vote in the House and the Senate before SAB 121 is thrown out.

Speaking at the markup hearing, crypto-friendly Republican Congressperson Tom Emmer said that SAB 121 was an “illegal” example of SEC Char Gary Gensler’s “unrelenting prejudice towards the digital asset ecosystem.”

Emmer said SAB 121 introduced “unnecessary and avoidable” concentration risk into the crypto ecosystem.

“The Bitcoin ETFs are a great example. Not a single bank provides the custodial services for any of the eleven approved ETFs. This is risky,” he added.

.@GaryGensler is violating the SEC’s statutory mission with SAB 121.

We must pass @USRepMikeFlood‘s resolution so Chair Gensler’s illegal rule ceases to be in effect.

See my remarks on the resolution below. pic.twitter.com/cn8HQV2cAb

— Tom Emmer (@GOPMajorityWhip) February 29, 2024

On the other hand, Democrat Congressperson Maxine Waters, one of the lawmakers who voted against the resolution, said that the move to rescind SAB 121 was an “ironic” move from crypto-friendly politicians.

“We often hear Republicans and the crypto industry complain about a lack of clarity from the SEC, but ironically, the resolution before us effectively blocks the SEC staff from providing that clarity around crypto,” she said.

SABs are not enforceable laws under the SEC’s purview. Instead, they are a series of non-binding guidelines used by SEC staff to help companies clarify how crypto firms should account for customer crypto holdings.

SABs do not require public notice or comment periods like other more formal rules.

American Bankers Association Supports Resolution To Overturn SEC Bitcoin Custody Policy

The American Bankers Association today said it supports a proposed House joint resolution expressing congressional disapproval of a Securities and Exchange Commission policy on safeguarding cryptoassets.

The policy—outlined in Staff Accounting Bulletin 121—requires SEC registrants to record an obligation to safeguard the cryptoassets that they hold at the fair value of the related assets. H.J. Res. 109 would overturn the policy if adopted by both houses of Congress and signed by the president.

In comments to the House Financial Services Committee, ABA said the SEC policy is a departure from the banking industry’s longtime practice of treating custody assets off-balance sheet and effectively precludes banks from offering digital asset custody at scale.

“Limiting banks’ ability to offer these services leaves consumers with few well-regulated, trusted options for their digital asset portfolios and ultimately exposes them to risk,” the association said.

During a markup hearing, the committee voted to advance the resolution to the House. In his opening statement, H.J. Res. 109 sponsor Rep. Mike Flood (R-Neb.) submitted ABA’s comments for the record. “You are locking out the most regulated institutions from a market that they know well, which is custody,” Flood said.

Updated: 2-29-2024

Bank of America’s Merrill, Wells Fargo Offer Bitcoin ETF Products For Clients

* Wealth Management Platforms Offer Access To Bitcoin ETFs

* Bitcoin Surges Toward A Record After Surpassing $60,000

Bank of America Corp.’s Merrill arm and Wells Fargo & Co.’s brokerage unit are offering access to ETFs that invest directly in Bitcoin, underscoring the increasing acceptance of the products by mainstream firms.

The banks are offering the approved ETFs to some wealth management clients with brokerage accounts who request the products, according to people familiar with the matter, who asked not to be identified discussing private information.

After years of industry speculation, nearly a dozen Bitcoin ETFs won approval from US regulators in January — with the landmark decision sparking a surge in demand for the vehicles.

But even with regulators’ blessing, it’s up to firms whether to offer trading in the Bitcoin-linked products and some may be reluctant to jump into a volatile asset class.

Many are diving in. Bank of America’s Merrill and Wells Fargo join Charles Schwab Corp. and Robinhood Markets Inc., which started offering the spot Bitcoin ETFs shortly after their approval.

UBS Group AG is also offering a number of the Bitcoin ETFs to some of its wealth management clients with brokerage accounts on an unsolicited basis, Bloomberg reported in January. Morgan Stanley is evaluating adding spot Bitcoin ETFs to its platform, according to CoinDesk.

A representative for Morgan Stanley declined to comment to Bloomberg.

Vanguard Group Inc. is among firms holding off, saying in a Jan. 24 blog post that “crypto is more of a speculation than an investment.”

A representative for Wells Fargo confirmed spot bitcoin ETFs are available — since their approval by the SEC — for unsolicited purchases, either through Wells Fargo Advisors or the bank’s online WellsTrade platform. A representative for Bank of America declined to comment.

The moves come as Bitcoin continued to rally to the highest price in more than two years. Bitcoin has jumped over 40% already this year atop the successful debut of the ETF products, which directly hold the token.

The batch of funds from the likes of BlackRock Inc. and Fidelity Investments went live on Jan. 11, wooing net inflows of about $7.4 billion to date.

NY Community Bank Replaces CEO As Loss Mounts To $2.7 Billion Shares Tumble

Feb 29 (Reuters) – New York Community Bancorp (NYCB.N), opens new tab replaced its CEO, reported a fourth-quarter loss that was more than 10 times what it previously stated and disclosed faults in its financial reporting in filings on Thursday that sent its shares tumbling.

The bank named Alessandro DiNello, executive chairman of its board, to the additional roles of president and CEO. He succeeded Thomas Cangemi, who the bank said had resigned from those roles on Feb. 23 but will remain on the company’s board, according to a regulatory filing.

Marshall Lux was appointed presiding director.

NYCB’s stock sank almost 21% in extended trade to $3.82.

The bank said it revised its fourth-quarter loss to $2.7 billion.

On Jan. 31, the lender reported a surprise net loss that triggered a broad selloff in regional bank shares and sparked renewed concerns about the health of the industry nearly a year after three regional lenders failed.

NYCB on Thursday, in another filing, opens new tab, said it carried out a review in which “management identified material weaknesses in the company’s internal controls.”

The faults “related to internal loan review, resulting from ineffective oversight, risk assessment and monitoring activities,” it said.

The lender will delay the publication of its annual report because its internal controls over financial reporting were “not effective” when its books were closed in 2023, the filing showed.

“These developments are entirely surprising and disappointing,” said JP Geygan, a portfolio manager and chief operating officer of Global Value Investment.

“We expect the stock to decline, and our concern now would be to understand the issues that led to this and the action the management would be taking to prevent it going ahead,” said Geygan, whose company holds a stake in NYCB.

NYCB bought some of failed Signature Bank’s assets last year. Combined with its 2022 acquisition of Flagstar Bank, the lender’s balance sheet swelled above a $100 billion regulatory threshold with stricter capital and liquidity requirements.

“The scope and magnitude of the recent leadership changes underscore the challenges facing NYCB as it works through considerable regulatory, credit and overall earnings uncertainty in its new status as an over $100 billion bank,” said David Smith, a bank analyst at Autonomous Research.

Shares sank to a nearly 27-year low on Feb. 6 after the bank was sued by shareholders. In the proposed class action, investors said the regional bank defrauded them by failing to disclose it would set aside more money for credit losses, and cut its dividend 71% to shore up its balance sheet.

While the management changes were unsurprising, “the material weakness is a tough headline,” wrote KBW analyst Chris McGratty. Market participants will focus on the company’s delayed financial disclosures and strategic update once it finishes reviewing its loan portfolio.

“The material weakness is an added layer of uncertainty…we remain on the sidelines,” he wrote

Updated: 3-1-2024

Regional Bank Stocks Fall After NYCB Fans Fears

Regional bank stocks slid Friday, led by a roughly 20% decline in New York Community Bancorp’s shares, as signs of trouble at that bank revived fears about the health of the sector nearly a year after three high-profile failures.

The SPDR S&P Regional Banking ETF fell more than 1%, while a broader index of bank stocks fell less than 0.5%. The S&P 500 edged higher.

Signs of Trouble At Regional Banks Reignite Sector Fears

New York Community Bancorp credit rating cut to junk; shares fell 26% Friday.

Bank stocks slid Friday, led by a 26% decline in New York Community Bancorp, after more signs of trouble at that lender and a smaller peer revived fears about the stability of the sector a year after a string of high-profile failures.

NYCB closed at its lowest level since 1997. The bank disclosed late Thursday that management had identified “material weaknesses” in internal controls related to the way it monitors and assesses risk in its loan books.

Those loans have been under scrutiny because of the bank’s high exposure to commercial real estate that has fallen in value.

“That language is particularly troubling,” said Steve Moss, a director at Raymond James. “That creates a lot of risk and uncertainty.”

Fitch Ratings cut NYCB’s credit rating to junk after the bank’s recent disclosures “prompted a reconsideration” around how adequately it has prepared for potential commercial real-estate losses.

Moody’s Investors Service also cut NYCB to several notches below investment grade. Both rating firms have downgraded the bank twice in the past month.

Hours before NYCB’s disclosures, a deal to shore up a smaller regional bank based in Philadelphia collapsed after the bank revealed its own internal-control issues.

That bank, Republic First Bancorp, said earlier this week its auditor had found “material weaknesses” in its controls at the end of 2022, including for key credit measures.

The terminated deal would have only filled a portion of a big capital hole at Republic First. Its shares were trading at a penny a piece this week.

NYCB and Republic First are much smaller than two of the three banks that failed after historic deposit runs in March 2023. But bankers, regulators and analysts are worried that more trouble could spark another crisis of confidence in regional banks.

The KBW Nasdaq Regional Banking Index and the SPDR S&P Regional Banking ETF each fell more than 1%. The S&P 500, meanwhile, was up nearly 1%.

Regional banks so far have been able to avoid the full-blown contagion that many feared a year ago, but they still face many of the same problems.

Federal Reserve officials have signaled they aren’t in a rush to lower interest rates from the highest level in decades, which has pushed up the cost of deposits and left many banks with paper losses on bonds they hold.

Some customers, especially corporate ones, have become wary of all but the megabanks. Many regional bank stocks are still sharply lower than a year earlier.

Now waves of commercial real-estate loans are set to come due, threatening to put more pressure on the smaller banks that hold high concentrations of them.

Borrowers either will have to refinance at much higher interest rates or hand over the keys to properties that have declined in value in recent years, which could stick banks with big losses.

Bankers are particularly concerned about office properties, where vacancies have surged since the rise of remote work.

At NYCB, an extensive portfolio of rent-stabilized properties in New York City is at risk after a 2019 law put a limit on how much landlords could increase rents on some units.

“There’s going to be a world of hurt in 2024,” said Leo Leyva, co-chair of the litigation, real estate and real estate special opportunities at Cole Schotz.

Still, bankers and regulators have said depositors aren’t panicking this year and there is less reason to fear a widening crisis.

The sector “is dealing with the overhang of some very unusual bank failures in the spring and the current issues with NYCB,” said Stacy Kymes, chief executive at Tulsa, Okla.-based BOK Financial.

“Those are not really representative of how the broader industry is performing,” he said.

The three banks that failed last year catered to tightknit business circles and wealthy customers who pulled deposits when the sector came under pressure.

Most Deposits At Silicon Valley Bank And Signature Bank

exceeded the $250,000 Federal Deposit Insurance Corp. limit.

NYCB said last month that deposits were stable and that nearly three-quarters were either within the FDIC limit or backed by collateral. At Republic First, deposits were down 13% from a year earlier at year-end, filings show, and around half of them were insured.

After acquiring much of the failed Signature Bank, NYCB has more than $100 billion in assets, roughly the same size that Signature was.

But it is about half the size of SVB and another bank that failed, First Republic Bank. With around $6 billion in assets, Republic First is much smaller.

NYCB has been in turmoil since late January when the bank disclosed a fourth-quarter loss and slashed its dividend. Its stock has lost roughly two-thirds of its value, it has overhauled its management and two board members have left.

The bank on Thursday changed chief executives, with executive chairman Alessandro DiNello succeeding Thomas Cangemi. DiNello is the former chief executive of Flagstar Bank, which NYCB acquired in late 2022. The bank also named a new chief risk officer and auditor on Friday.

This week, NYCB also said it had to take a $2.4 billion charge in the fourth quarter related to write-downs of acquisitions before the 2008 financial crisis. The bank said the charge wouldn’t change the bank’s regulatory capital ratios.

“While we’ve faced recent challenges, we are confident in the direction of our bank,” DiNello said in a statement Thursday.

To shore up its balance sheet, NYCB could try to sell assets or shrink itself, DiNello has said. It has also considered a capital raise, people familiar with the matter said, or a financial instrument in which it pays a fee to share credit risk with a third party.

NYCB shares traded below $4 a piece on Friday, down from around $10 earlier this year.

NYCB Downgraded To Junk By Fitch, As Moody’s Goes Even Deeper

New York Community Bancorp’s credit grade was cut to junk by Fitch Ratings, and Moody’s Investors Service lowered its rating even further, a day after the commercial real estate lender said it discovered “material weaknesses” in how it tracks loan risks.

Fitch downgraded the bank’s long-term issuer default rating to BB+, one level below investment grade, from BBB-, according to a statement

Friday. Moody’s, which cut the bank to junk last month, lowered its issuer rating to B3 from Ba2.

The bank’s discovery of weaknesses “prompted a reconsideration of NYCB’s controls around adequacy of provisioning, particularly with respect to its concentrated exposure to commercial real estate,” Fitch said.

The bank’s announcement Thursday that it needs to shore up loan reviews reignited investor concern about the firm’s potential exposure to struggling commercial-property owners, including New York apartment landlords.

The stock plunged 26% Friday, even as the company said it doesn’t expect that control weaknesses will result in changes to its allowance for credit losses.

“Moody’s believes that NYCB may have to further increase its provisions for credit losses over the next two years because of credit risk on its office loans,” the credit rater said in a statement.

It also pointed to “substantial repricing risk on its multifamily loans.”

NYCB’s stock ended the week at $3.55, bringing its decline this year to 65%.

“The company has strong liquidity and a solid deposit base,” Chief Executive Officer Alessandro DiNello, who took over this week, said in a statement earlier Friday.

“I am confident we will execute on our turnaround plan to deliver increased shareholder value.”

Updated: 3-4-2024

NYCB Extends Rout After Latest Round of Credit Downgrades

* Bank’s Stock Slumps 23%, Adding To Friday’s 26% Rout

* Rating Cuts Threaten To Increase NYCB’s Borrowing Costs

New York Community Bancorp tumbled for a second straight day after a pair of rating downgrades threatened to boost the beleaguered bank’s borrowing costs.

Shares of the company fell 23% to close at the lowest level since 1996, after plunging 26% on Friday.

Fitch Ratings cut its assessment to non-investment grade and Moody’s Investors Service, which already had a junk rating on the bank, lowered it even further late Friday.

That day’s rout had followed the bank’s disclosure that it replaced its chief executive officer after finding “material weaknesses” in how it tracks loan risks.

The downgrades “pressure their cost of capital,” Wedbush Securities Inc. analyst David Chiaverini, who has an underperform rating on NYCB’s shares, said in an interview.

The stock, which was a relative winner among regional banks in 2023, has lost more than two-thirds of its value so far this year.

The slump began after the bank’s earnings report in January, which included a steep cut to the dividend and higher provisions for loan losses.

Moody’s Had Lowered

its credit rating to junk in February. The rating company on Friday also downgraded the long-term deposit rating on NYCB’s lead bank, Flagstar Bank, to Ba3 from Baa2.

The rating cut might lead to deposit volatility for the company’s mortgage-escrow business, Bloomberg Intelligence analyst Herman Chan wrote in a note.

NYCB didn’t respond to requests for comment about the impact of the rating cut. In an update last month, the firm had said its liquidity-coverage ratio for uninsured deposits was 163%.

Despite NYCB’s slide, bank stocks more broadly fared well. The KBW Bank Index gained 1.8% Monday, while a regional gauge that includes NYCB slipped 0.6%.

Updated: 5-7-2024

Susquehanna International Group Adds $1B In Bitcoin ETFs To portfolio

According to a filing with the U.S. SEC, Susquehanna International Group invested more than $1 billion in Bitcoin ETFs in Q1 2024.

According to a 13F-HR filing on May 7, quantitative trading firm Susquehanna International Group purchased more than $1 billion worth of shares of spot Bitcoin (BTC) exchange-traded funds (ETFs) in the first quarter of 2024.

The firm disclosed to the United States Securities and Exchange Commission ownership of 17,271,326 shares in the Grayscale Bitcoin Trust (GBTC), with a market value of approximately $1.09 billion as of March 31, 2024.

Additionally, Susquehanna reported owning 1,349,414 shares of the Fidelity Wise Origin Bitcoin Fund (FBTC), valued at roughly $83.74 million on the same date.

Moreover, the firm increased its stake in the ProShares Bitcoin Strategy ETF (BITO), which gives investors exposure to Bitcoin futures contracts.

According to investment research firm Fintel, Susquehanna owned 7,907,827 shares of BITO as of March 31, valued at approximately $255.42 million — up 57.59% from a February filing that listed 5,021,149 shares.

The company had indirect exposure to Bitcoin’s spot price through MicroStrategy stock (MSTR), which holds 214,400 BTC on its balance sheet.

However, Susquehanna reduced its stake in MicroStrategy by nearly 15% during the portfolio rebalancing, from 287,180 shares in February to 244,863 shares on March 31.

Overall, Susquehanna’s cryptocurrency allocation represents a tiny fraction of the trading firm’s portfolio, which ended the first quarter valued at more than $575.8 billion.

Among the company’s top investments are Nvidia Corporation and the index-tied SPDR S&P 500 ETF Trust. In addition to Bitcoin funds, Susquehanna’s new holdings for the past quarter include shares of the convertible bonds firm Convertible Zero, bonds from NRG Energy Inc and preferred stocks in Albemarle Corporation.

Bitcoin funds are increasingly being used by trading firms and financial advisers to gain exposure to digital assets. In April, Fidelity’s Bitcoin ETF secured $40 million from two traditional financial advisers, Legacy Wealth Management and United Capital Management of Kansas.

Each fund invested $20 million in FBTC, joining the fund’s top shareholders.

The advisers are popular among a significant population of baby boomers, who own a sizable share of the country’s wealth. Legacy Wealth Management manages assets exceeding $359 million, while United Capital Management of Kansas oversees more than $436 million in assets.

Updated: 5-10-2024

Wells Fargo Reports Exposure To Grayscale And ProShares Bitcoin ETFs

The bank reported holding $143,111 worth of shares of the ProShares Bitcoin Strategy ETF, Grayscale Bitcoin Trust and Bitcoin Depot.

Major United States-based financial services firm Wells Fargo has disclosed investments in Bitcoin (BTC) exchange-traded funds offered by Grayscale and ProShares.

In a May 10 filing with the U.S. Securities and Exchange Commission, Wells Fargo reported it held 37 shares of the ProShares Bitcoin Strategy ETF (BITO), which offers exposure to BTC futures, and 2,245 shares of Grayscale Bitcoin Trust (GBTC), which was converted to an ETF.

The firm also reported 52 shares in Bitcoin Depot, a crypto ATM provider.

The total value of the three Bitcoin-related investments was $143,111, a significantly small holding for the major bank. Wells Fargo reported roughly $1.7 trillion in assets as of June 2023, making it the third-largest bank in the U.S. by holdings.

The SEC added that observers should not assume that the information provided by the financial firm was “accurate and complete.”

The SEC approved the listing and trading of spot Bitcoin ETFs on U.S. exchanges in January.

Trading firm Susquehanna International Group reported it purchased more than $1 billion worth of shares of the spot crypto ETFs in the first quarter of 2024, largely comprised of the Grayscale Bitcoin Trust, Fidelity Wise Origin Bitcoin Fund and ProShares Bitcoin Strategy ETF.

JPMorgan Reports Holding Shares Of Several Spot Bitcoin ETFs

The largest bank in the U.S. with $2.6 trillion in assets reported to the SEC that it had purchased roughly $760,000 worth of shares of Bitcoin ETFs.

United States-based financial company JPMorgan Chase has disclosed investments in Bitcoin (BTC) exchange-traded funds offered by Grayscale, ProShares, Bitwise, BlackRock and Fidelity.

In a May 10 filing with the U.S. Securities and Exchange Commission (SEC), JPMorgan Chase reported it held roughly $760,000 worth of shares of the ProShares Bitcoin Strategy ETF (BITO), BlackRock’s iShares Bitcoin Trust (IBIT), Fidelity’s Wise Origin Bitcoin Fund (FBTC), Grayscale Bitcoin Trust (GBTC) and the Bitwise Bitcoin ETF.

In addition, the bank reported 25,021 shares worth roughly $47,000 in Bitcoin Depot, a crypto ATM provider.

The SEC filing came the same day as Wells Fargo reported exposure to Grayscale and ProShares Bitcoin ETFs in its holdings and Bitcoin Depot.

Susquehanna International Group reported on May 7 that it purchased more than $1 billion worth of shares of the spot crypto ETFs in the first quarter of 2024.

JPMorgan Chase is the largest bank in the U.S. by assets, controlling roughly $2.6 trillion. The SEC added that observers should not assume that the information provided by the financial firm was “accurate and complete.”

The SEC approved the listing and trading of spot Bitcoin ETFs on U.S. exchanges in January. Many experts expect the commission to decide on spot Ether (ETH) exchange-traded funds by May 23, when an application from asset manager VanEck reaches its final deadline.

Updated: 6-1-20124

Banksters Tell Biden, “Thanks But No Thanks, We Want In On This Bitcoin Industry”!

US Banking lobby last-minute bid to stop biden vetoing SAB 121 overturn.

“Precluding regulated banking organizations from effectively providing digital asset safeguarding services at scale harms investors, customers, and ultimately the financial system,” the ABA wrote in a May 31 letter to Biden, just before he announced his decision to veto the Congressional resolution aimed at repealing the U.S. Securities and Exchange Commission (SEC) SAB 121 guidelines.

“The SAB 121 represents a significant departure from longstanding accounting treatment for custodial assets and threatens the industry’s ability to provide its customers with safe and sound custody of digital assets,” the ABA explained.

“Limiting banks’ ability to offer these services leaves customers with few well-regulated, trusted options for safeguarding their digital asset portfolios and ultimately exposes them to increased risk,” it added.

The American Bankers Association claims that United States President Joe Biden’s move will “harm investors, customers, and ultimately the financial system.”

Just hours prior to United States President Joe Biden vetoing the Staff Accounting Bulletin (SAB) 121 repeal on May 31, the largest lobbying organization for the U.S. banking industry — American Bankers Association (ABA) — penned a letter in an attempt to sway his decision.

Even though both chambers of Congress, the House of Representatives and the Senate, voted in favor of repealing the SAB 121 guidance, Biden opted to use his presidential veto authority, preventing the guidance from being overturned.

The lobbying group explained that the SAB 121 is a big change from how custodial assets are usually treated, and it could make it harder for the industry to keep digital assets safe for customers.

Those In The Bitcoin Industry May Find The ABA’s Pro-Bitcoin Statement Surprising

For some in the Bitcoin industry, the ABA’s pro-Bitcoin statement may be surprising, especially considering that just last year, reports surfaced of the group helping Senator Elizabeth Warren, known for her skepticism towards Bitcoin, in drafting anti-Bitcoin legislation.

In December 2023, Cointelegraph reported on a video that surfaced on X (formerly Twitter), Roger Marshall admitted that he and Elizabeth Warren approached the ABA for assistance in crafting the Digital Asset Anti-Money Laundering Act.

“The first thing that we did is that we went to the American Bankers Association and said ‘help us craft this,” Marshall stated.

The Banks Are Coming To Bitcoin!

Yes, banks are coming to Bitcoin in the U.S. – to bitcoin custody, specifically. Is this good or bad for Bitcoin markets? The answer is: both.

Bloomberg reported last week that the SEC is now granting “exceptions” to its punitive accounting standard called SAB-121 for “several large banks,” which an SEC spokesman subsequently confirmed to Fox Business.

This new fact means some banks are no longer constrained by an accounting rule that previously penalized banks for providing custody services for bitcoin and crypto.

After SAB-121 was announced in 2022 many banks downsized or shut down their crypto custody businesses, but this SEC news means the SAB-121 obstacle is no longer in the banks’ way if they can meet the SEC’s workaround requirements. (Bank regulations might still be in the way, though, which is where Custodia Bank may help. Hold that thought.)

The history of banking in the U.S. is one in which large banks that have capital capacity but are growth-constrained will cyclically seek growth through acquisition – usually by acquiring faster-growing asset originators from outside traditional banking. The SEC’s SAB-121 reversal means another such wave is likely.

Buckle up!

Why It’s Good For Bitcoin Markets That The Banks Are Coming

First, banks structurally provide better protection for custody customers than non-banks can, due to a particular legal feature of banks in the U.S.: by law, banks cannot be dragged into bankruptcy, which – in this context – means custody assets held by a bank cannot be subjected to the uncertainties of the federal bankruptcy process, such as the possibility of subjecting customers’ custodied assets to preferences.

Banks are exempt from these uncertainties, and are instead subject to special receivership statutes that are designed to protect customers and ensure they continue to own their assets under custody if the bank ever fails.

The SEC is clearly focused on this issue in granting banks exceptions to SAB-121. An SEC spokesman confirmed it is giving such exemptions if their fact pattern differs from SAB-121, “…such as ensuring that customers maintain ownership of their assets even in the case of a resolution….”

Well, by definition banks fit that pattern – because banks cannot be dragged into bankruptcy court, where customers’ assets under custody could become subject to preferences.

Customers of non-banks such as Celsius and BlockFi have learned the hard way about bankruptcy preferences. Celsius’s custody customers agreed to settle with the bankruptcy trustee to recover only $0.725 per dollar of their assets under custody because – even though the bankruptcy court deemed those custody assets to belong to the customers, the trustee could not release them until all preferences cleared.

Custody customers settled for $0.725 rather than wait years until the bankruptcy court cleared all the preferences. Two weeks ago, the Celsius bankruptcy trustee sued thousands of former Celsius customers to claw back assets into the estate.

All else equal, custody customers are better-protected legally if their custodian is a bank. Two crypto-native companies are established banks today: Custodia Bank and Kraken Bank.

Second, banks entering the Bitcoin and crypto custody business will of course bring liquidity, because banks bring connectivity to the traditional financial system. Wall Street is coming.

Why It’s Bad For Bitcoin Markets That The Banks Are Coming

It’s a double-edged sword. Banks bring liquidity but they also bring leverage-based financialization (aka “paper bitcoin”), which artificially impacts bitcoin’s price.

Here are links to explanations why “leverage and bitcoin do not mix, period;” or why “a fool and his leveraged bitcoin are soon parted;” or why if banks go greater than 1:1 leverage, this will someday take down a G-SIB (global systemically important bank).

Wall Street’s practices of rehypothecation, commingling and collateral substitution mean it can be easy for leverage to exceed 1:1 without banks’ risk systems detecting it. (Leveraging bitcoin is fine, as long as the leverage stays below or equal to 1:1.) But banks must be especially careful to segregate Bitcoin from their other exposures.

How Does Custodia Bank Enter The Picture?

Now that the SEC is granting “exceptions” to “several large banks” to enter crypto custody, what’s next for banks?

Banks have a decision: buy vs. build vs. rent, if they want to enter crypto custody. This is where Custodia Bank can help.

Banks entering crypto custody will need to comply with a multitude of bank regulations enacted since SAB-121 – including, for example, the Fed’s novel activities supervision program and third party risk management guidance.

The FFIEC exam manual has not yet been updated for crypto activities, but two states – New York and Wyoming – have updated their exam manuals for crypto activities. The Wyoming exam manual is public, and it’s based heavily on the FFIEC exam manual as adapted for crypto by Promontory, which consulted for the State of Wyoming.

Here Are Some Considerations For A Bank’s Buy Vs. Build Vs. Rent Decision:

Buy: Banks can offer what non-bank crypto custodians cannot at present – the legal benefits of being a bank. I’ve long thought bitcoin custody markets would migrate toward using banks as legal entities, which is exactly what happened in securities custody due to the inherent structural advantages of banks as legal entities.

Since crypto-native companies have been blocked from obtaining bank charters (specifically, from obtaining federal depository institution charters or FDIC insurance for state depository institution charters), this means Washington, D.C. gatekeepers have handed a structural advantage to incumbent banks.

But banks buying non-bank crypto companies will face big operational challenges with the integrations. Specifically, non-bank crypto companies have not been operating under the strict guidelines applicable to banks and will likely need upgrades to BSA/AML/OFAC compliance and operational risk management programs once they become owned by a bank.

One obvious challenge is that non-bank crypto companies have cloud-native architectures, and mixing on-prem with cloud-native architectures poses increased risk to the bank acquirer.

Build: The safest way for a bank to offer crypto custody is to build it in-house. This is what Custodia did, and that’s not a fast process. As a software developers’ saying goes, every third party is a potential security hole. Building native takes time; building by piecing together third parties is available but it amplifies risk issues.

A bank could build crypto custody quickly by piecing together infrastructure vendors designed to facilitate speed to market – indeed, many crypto-native companies got to market quickly by doing this.

But banks’ third-party risk management requirements (and possibly the Bank Service Company Act) make this harder for banks. Piecing together vendors may not be an attractive option for banks.

Rent: If a bank knew that there’s a bitcoin custodian built to bank standards, that was constructed to meet third-party risk management requirements, that is examined under a crypto-updated version of the FFIEC exam manual, and that could satisfy the SEC’s requirement for an SAB-121 exception (to “…ensur[e] that customers maintain ownership of their assets even in the case of a resolution…”), it would be strategically advantageous for the bank to discuss a potential partnership arrangement with that custodian.

Custodia Bank is that custodian.

We are open to talking to banks mapping out their bitcoin custody strategy about creating new sub-custody and other partnership arrangements.

Get In Touch With Us: info@custodiabank.com.

Thanks for reading!

Caitlin Long, CEO

Updated: 7-11-2024

SEC Allows Some Exceptions To Bitcoin (SAB 121) Accounting Compliance

* Banks, Brokerage Firms Might Bypass Balance Sheet Reporting

* Two-Year-Old Guidance Unsuccessfully Challenged In Congress

The SEC has opened a path for banks and brokerages to avoid reporting their customers’ crypto holdings on their balance sheets. But companies must offset risks those assets pose in order to bypass controversial crypto accounting guidance that has become a target of Congress.

Staff with the Securities and Exchange Commission have begun to dole out guidance that certain arrangements may not require a liability to be reported on the balance sheet under staff guidance issued two years ago, said an SEC source familiar with the regulator’s approach.

Several large banks that have consulted with SEC staff starting in 2023 got the green light to bypass the balance sheet reporting by ensuring their customers’ assets would be protected in the event of a bankruptcy or failure.

Other steps such as internal safeguards meant to better protect those holdings would address legal risks tied to the burgeoning asset class, the source said.

The regulator believes that the guidance worked and companies have adjusted to address the threats that hacking and business failures have posed to investors, the source said.

The SEC’s accounting stance could expand the range of companies that American crypto holders could choose among to stow their growing portfolios.

Lenders have argued the accounting treatment effectively barred them from offering crypto services because bigger balance sheets would trigger capital requirements set by banking regulators, not the SEC.

Bank and financial industry trade groups have urged Congress to rescind the staff guidance, which is effectively an agency rule. The House on Thursday failed to override a presidential veto of a measure that would have revoked what is known as Staff Accounting Bulletin 121, effectively leaving the measure in place.

SEC staff issued the guidance in 2022 months before the collapse of crypto exchange FTX and said the extraordinary reporting was needed to keep investors informed about the technological and legal risks posed by the nascent technology.

Coinbase Global Inc. and Robinhood Markets Inc. have been reporting the value of their customers’ crypto assets on their balance sheets since 2022.

Banks have successfully argued during closed-door consultations with SEC staff that wallets and spot Bitcoin exchange traded products should be outside the scope of the crypto guidance, the source said.

Financial institutions have grown eager to take part in the crypto industry, especially now that the SEC has approved spot Bitcoin products, said Aaron Jacob, head of accounting solutions at TaxBit, which provides crypto accounting products for exchanges and investors.

“You can’t go to some of the largest, oldest financial institutions in America because they’re not allowed to play in that game,” he said.

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