U.S. Banks and Financial Associations vs. SEC
Currently, U.S.-based financial institutions have their hands tied when it comes to crypto and tokenization use cases. In February 2024 the American banking associations sent a remarkable statement to the SEC to finally make blockchain use cases scalable for U.S.-based financial institutions.
𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝: 𝐒𝐄𝐂 𝐯𝐬. 𝐁𝐚𝐬𝐞𝐥 𝐂𝐨𝐦𝐦𝐢𝐭𝐭𝐞𝐞
— The SEC imposes significantly stricter requirements on financial institutions regarding capital requirements (SAB 121) than the Basel Committee (SCO60). The SEC imposes an on-balance sheet application for the custody of crypto assets for third parties, including an appropriate capital ratio. According to the Basel Committee, crypto assets entail a capital requirement of ≥100%, but only if held by a financial institution.
— The SEC defines crypto assets as “a digital asset that is issued and/or transferred using distributed ledger or blockchain technology using cryptographic techniques”. Therefore, tokenized securities are subject to the exact capital requirements as crypto assets, even if they are only held in custody for third parties. On this point, the Basel Committee distinguishes between the blockchain technologies applied for tokenization (permissionless vs. permissioned blockchains).
𝐈𝐦𝐩𝐚𝐜𝐭:
— Due to the required capital ratio, it is practically impossible for U.S. banks to serve as crypto custodians for the recent Bitcoin ETPs, leaving this business entirely to nonbank asset custodians.
— It is also nearly impossible for U.S. banks to serve as custodians for tokenized securities as the SEC’s definition of crypto assets does not distinguish between tokenized securities and crypto assets such as Bitcoin and Ethereum, and therefore, the same capital ratio is required. However, large-scale adoption of tokenized assets will not happen without the global custodians onboard.
𝐃𝐞𝐦𝐚𝐧𝐝:
— SEC to adjust the definition of crypto assets and exclude assets that do not present the same risks as crypto assets, i.e., tokenized bonds, stocks, etc.
— exempt financial institutions from on-balance sheet requirement
— Disclosure requirements for crypto asset-related business to be kept
Authors
Benjamin Schaub is a managing partner at intas.tech, a consulting firm specializing in strategically assessing blockchain use cases and integrating digital assets into existing business models and IT infrastructures. Before joining intas.tech, he worked as a project manager for the Frankfurt School Blockchain Center, with a research focus on blockchain infrastructures and crypto custody. He is also a co-author of several blockchain studies.(www.linkedin.com/in/benjamin-schaub).
About intas.tech
intas.tech is a strategy consulting firm for focusing on the strategic assessment of blockchain use cases as well as the integration of digital assets into existing business models and IT infrastructures. The unique combination of blockchain know-how and in-depth expertise in the regulatory environment enables holistic, cross-industry consulting approach.
