Their demands are positive, but could make the business too expensive for already heavily regulated banks.
Regulations often solve one problem while creating another. Such is the case of the new guidelines on cryptocurrencies that the SEC, the United States Securities Market Commission, is suggesting. The watchdog wants companies that safeguard digital assets to mark that risk on their balance sheets, and for banks to end up having to hold large amounts of capital against it. That could help transparency, something the market needs. But it would be too costly for legitimate lenders like Goldman Sachs to enter the market, and it would incentivize more shadowy business.
Without prior notice, Gary Gensler’s agency issued an accounting bulletin two months ago recommending listed companies account for the risk of safeguarding the $1.2 trillion cryptocurrency market for their clients by recording it on their balance sheet as a liability at the fair market value of the currency. Most companies would have to comply starting with second-quarter financial statements.
Banks would be the most affected. This new measure could trigger compliance with the rules of the Basel Committee, which includes the Federal Reserve. Last year, that group issued recommendations that a bank would have to effectively equate the amount of capital on its balance sheet with the amount it held of a digital asset, assuming a capital ratio of 8%. Therefore, for each dollar of crypto, net worth would have to increase by the same proportion, although the largest US banks have even stricter regulations.
The SEC guidelines would make it practically too costly for banks to hold crypto for customers, and leave other businesses in the lurch. Crypto exchange Coinbase Global had some $246 billion in customer digital assets as of March 31, which may have to be added to its $21 billion balance sheet. Online broker Robinhood Markets’ position would double its $20 billion balance sheet, according to first-quarter figures. The measure could even apply to companies that outsource the custody of digital assets to third parties, such as Goldman.
It would be useful to have some barriers and more information. Should the value of a cryptocurrency drop, it can be difficult for a custodian holding the asset, say State Street, to sell large amounts of it. And, depending on the magnitude of the drop, banks like Goldman could be left red-handed, and given the volatility of cryptocurrencies, that could create some risks.
However, there is a balance, and making it completely prohibitive for banks is a bigger problem. The cryptocurrency market is already riddled with entities that use the asset to execute dubious transactions. If the SEC’s goal is to make investments safer, measures so strict that they prevent heavily regulated US banks from participating do the opposite.
