SEC Guidance Allows Banks and Brokerages to Avoid Reporting Customers’ Crypto Holdings on Balance Sheets

The Securities and Exchange Commission (SEC) has paved the way for banks and brokerages to avoid reporting their customers’ crypto holdings on their balance sheets, marking a significant shift in regulatory guidance for the burgeoning asset class.

According to an SEC source familiar with the regulator’s approach, certain arrangements may now be exempt from liability reporting on balance sheets, provided that companies take steps to mitigate the risks associated with crypto assets. This development comes in response to controversial crypto accounting guidance that has drawn scrutiny from Congress.

Several major banks have already received approval from the SEC to bypass balance sheet reporting by implementing measures to protect their customers’ assets in the event of bankruptcy or failure. Internal safeguards and other risk-mitigation strategies are being put in place to address legal risks tied to the crypto industry.

The SEC’s revised accounting stance is expected to broaden the range of companies that American crypto holders can choose from to store their assets. Previously, the accounting treatment had hindered banks from offering crypto services due to capital requirements set by banking regulators.

Industry trade groups have lobbied Congress to rescind the SEC’s staff guidance, which effectively functions as a regulatory rule. However, a recent attempt to override a presidential veto of a measure aimed at revoking the guidance was unsuccessful, leaving the measure in place.

The SEC initially issued the guidance in 2022 following the collapse of crypto exchange FTX, citing the need to inform investors about the risks associated with the nascent technology. Companies like Coinbase Global Inc. and Robinhood Markets Inc. have been reporting the value of their customers’ crypto assets on their balance sheets since then.

Financial institutions have expressed eagerness to enter the crypto industry, particularly now that the SEC has approved spot Bitcoin products. Aaron Jacob, head of accounting solutions at TaxBit, noted that traditional financial institutions have been restricted from participating in the crypto market, but the recent regulatory developments may change that landscape.