State Street Eager to Enter Crypto Market, Hindered by SEC Regulatory Hurdles

State Street, the world's largest custodian, is eager to enter the cryptocurrency market but is hindered by the SEC's regulatory approach. The SEC's rules require firms to list crypto assets as both assets and liabilities, posing a problem for banks' capital cushions.

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Nitish Verma
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State Street Eager to Enter Crypto Market, Hindered by SEC Regulatory Hurdles

State Street Eager to Enter Crypto Market, Hindered by SEC Regulatory Hurdles

State Street, the second oldest bank in the U.S. and the world's largest custodian, is eager to enter the burgeoning cryptocurrency market. However, the bank's ambitions have been stymied by the Securities and Exchange Commission's (SEC) unusual regulatory approach to digital assets.

Donna Milrod, State Street's chief product officer, expressed the bank's interest in safeguarding billions of dollars worth of Bitcoin for large financial institutions like BlackRock. "We're raring to go," Milrod stated, citing State Street's extensive experience and capabilities in asset custody. Despite the bank's enthusiasm, it was not granted approval to launch Bitcoin exchange-traded funds (ETFs) in January, while crypto incumbent Coinbase secured the custody assignment for nearly all of the newly approved funds.

Why this matters: The SEC's regulatory stance on crypto assets has far-reaching implications for the adoption and integration of digital assets into the mainstream financial system. If unresolved, this regulatory hurdle could stifle innovation and limit access to crypto markets for institutional investors.

The primary obstacle hindering State Street's entry into the crypto market is the SEC's regulatory stance. The agency requires firms to list crypto assets held on behalf of others as both assets and liabilities on their balance sheets. This accounting rule, which does not apply to non-crypto assets held in custody, has been described as "insane" by a former State Street executive. The rule effectively means that holding crypto is a wash, but it poses a problem for banks since their capital cushions are determined by the size of their balance sheet.

Despite the SEC's attempts to throttle the crypto industry, banks are rapidly adopting blockchain technology, and it appears to be only a matter of time until elements of crypto are integrated into all parts of the financial system. Crypto advocates are also challenging the SEC's regulatory obstruction in the courts and in Congress. In a recent development, the House of Representatives passed a bill aiming to nullify the SEC's controversial crypto custody interpretation, known as SAB 121, with the support of 21 Democrats.

As the largest custodian in the world, State Street's entry into the crypto market could significantly bolster the legitimacy and mainstream adoption of digital assets. However, the bank's ambitions remain hindered by the SEC's unusualregulatory choices, which impose onerous capital requirements and effectively block banks from providing crypto asset custody. The ongoing battle between the crypto industry and the SEC is likely to have far-reaching implications for the future of digital assets in the U.S. financial system.