While the recent launch of Bitcoin Exchange-Traded Funds (ETFs) in the US caused a stir among investors, now major banks also want a piece of the action. While these ETFs have seen initial success, banks feel left out due to regulations that make it costly for them to act as custodians. Here is a take on the current situation and what banks are proposing for a bigger role in the Bitcoin ETF game.
Feeling Shut Out- Banks Petition the SEC
Leading US banks, through their trade group coalitions, have appealed to the Securities and Exchange Commission for friendlier guidelines regarding holding digital assets for customers. This comes after the SEC approved multiple Bitcoin ETFs in January, which sparked significant interest and investment.
The crux of the issue lies in a specific guideline referred to as the Staff Accounting Bulletin 121 (SAB 121), which was issued in March 2022. This guidance obliges banks to hold any crypto assets they custody on their balance sheets, leading to higher capital requirements and making the service expensive to offer. As a result, major banks have not been involved in the current Bitcoin ETF dynamics despite their role in other similar products.
Proposed Changes- Narrowing the Definition and More Flexibility
The bank trade groups propose two key changes to SAB 121:
Narrow the definition of crypto assets- Exclude traditional assets recorded on the Blockchain, like tokenized deposits, from falling under the strict crypto guidance. This would provide more flexibility for banks to deal with various digital assets.
Exempt banks from the on-balance sheet requirement– Allow banks to hold these assets off-balance sheet while still requiring disclosures to maintain transparency for investors. This would significantly reduce the cost barrier for banks to offer crypto custody services.
By implementing these changes, banks believe they can play a more active role in the Bitcoin ETF market, offer custody services and participate in this growing investment opportunity.
Growing Demand and Changing Landscape
This push from banks reflects the increased interest and legitimacy Bitcoin ETFs are gaining. With over $4 billion already invested in these ETFs, despite competing outflows from other crypto products, it is evident that demand is strong.
Furthermore, the success of Bitcoin ETFs is attracting new players, not just institutions but also investors from different regions like China, Europe, and Canada. This growing global interest signifies a shift in the cryptocurrency landscape, with traditional financial institutions like banks looking for ways to integrate and adapt.
What Lies Ahead?
Investors seem to be losing interest in gold as a haven asset, with over $3 billion flowing out of gold ETFs (exchange-traded funds) since the beginning of the year. This suggests a potential shift towards Bitcoin ETFs, which are currently much smaller (only 1/13th the size of the gold ETF market). Interestingly, Bitcoin ETFs achieved this level of investment in just one month, while it took gold ETFs two years to reach the same point. This rapid growth in Bitcoin ETFs could indicate a changing perception of digital assets as an alternative investment option.
The SEC has not yet responded to the banks’ proposal, but their request represents a significant development in the evolving relationship between traditional finance and crypto. Whether the SEC approves the changes or proposes alternatives remains to be seen.
Celine Brooks is a renowned journalist and author specializing in cryptocurrency and blockchain technology. She holds a Master’s degree in Economics from Harvard University and is very passionate about Crypto. Celine regularly hosts webinars and workshops, sharing her insights and forecasts about the evolving digital currency landscape. She is also an active contributor to several leading financial and tech publications, where she breaks down complex crypto trends into understandable insights for everyday investors.