In our previous blog post, we delved into SAB 121 (Staff Accounting Bulletin Number 121), which restricts banks from offering crypto custody services. This week, the House of Representatives made an attempt to overturn President Joe Biden's veto of a resolution that aimed to nullify SAB 121. Unfortunately, they fell short of the required two-thirds majority, leaving SAB 121 firmly in place.
This bulletin holds significant implications for publicly traded banks, as it mandates the listing of digital assets on their balance sheets as liabilities. This deviates from the traditional method where custodial assets are kept off the balance sheet, posing a challenge for large banks to scale a crypto custody business efficiently (American Banker).
Introducing Basel III: A Broader Framework for Banking Regulations
Another critical regulatory framework that impacts banks is Basel III. Basel III is a comprehensive set of reform measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-2009. These standards serve as minimum requirements for internationally active banks, with member countries committed to implementing them within specified time frames.
A key component of Basel III is the requirement for banks to hold substantial amounts of high-quality capital to cover potential losses. This includes any exposure to crypto assets. Given the volatile nature of cryptoassets, banks may need to allocate significant capital to cover potential losses from these holdings. This requirement can act as a deterrent due to the increased cost of maintaining adequate capital buffers (BIS).
Emerging Solutions in the Face of Regulatory Challenges
Given the current regulatory landscape, banks find themselves unable to hold crypto assets on their balance sheets. Consequently, innovative solutions are emerging to address this challenge.
Rise & Shine Partners, set up as a 506(c) Delaware Fund, is trusted infrastructure provider and can be seen as a viable solution. By holding the assets required for staking and managing the infrastructure, Rise & Shine Partners allows banks to use protocol infrastructure needed for applications while reducing balance sheet exposure. Additionally, they handle the technical aspects of managing the infrastructure, providing a seamless solution for banks navigating the complexities of crypto custody and regulatory compliance.
In summary, while SAB 121 and Basel III present significant hurdles for banks in the realm of crypto custody, innovative solutions like those offered by Rise & Shine Partners provide a viable path forward. By leveraging such partnerships, banks can explore blockchain solutions without compromising their regulatory standing or operational efficiency.
