US banks invite the SEC to rethink the regulation of Bitcoin ETFs

Is the current regulation on Bitcoin ETFs on the brink of a major overhaul? That’s what a group of US banks hopes for, having recently invited the chairman of the SEC to reconsider certain measures regarding the regulation of these assets. Details follow in this article.

A Call for a Revision of Bitcoin ETF Regulations

A coalition of American banks has sent a letter to Gary Gensler on February 14th to notify him of their desire to actively participate in the Bitcoin ETF market. Among the banking institutions forming this alliance are the Bank Policy Institute, the American Bankers Association, and the Securities Industry and Financial Markets Association.

These banks specifically consider capital and reserve requirements as constraints that prevent them from offering Bitcoin ETF custody services. Yet, they already perform custody roles for most other exchange-traded products (ETPs). In its letter, the coalition warns against the risks this represents for investors and the financial system. According to it, if regulated banking institutions cannot provide asset custody services, investors will turn to providers who cannot offer them necessary legal protections.

Furthermore, the coalition alerts against the risk of hegemony if a single non-banking actor comes to dominate custody services for these Bitcoin ETFs. It implicitly refers to Coinbase, the largest crypto exchange based in the US, which indeed holds assets for eight Bitcoin ETF issuers.

US banks, left off key bitcoin ETF roles, are pushing SEC to tweak guidance around holding digital assets. A bank trade gp coalition sent SEC letter asking them exclude ETFs from broad crypto umbrella. They want a piece of the action. I don't blame them, it isn't fair.… pic.twitter.com/advPa94nK2

— Eric Balchunas (@EricBalchunas) February 15, 2024

The Reform Proposals Put Forth by the Banks

While highlighting the flaws of the current regulation on Bitcoin ETFs, the coalition has not failed to suggest solution pathways for a favorable outcome. It invites the SEC to revise the definition of cryptocurrencies in the Staff Accounting Bulletin 121 (SAB 121) to exclude traditional financial assets registered or transferred on blockchain networks.

This distinction would exempt banks from asset accounting requirements while maintaining disclosure obligations, thereby promoting a transparent participation of these institutions in certain crypto activities. This approach seeks to balance the need for investor transparency with the desire to integrate banks into the digital asset ecosystem more significantly.

Awaiting the SEC’s response, the banks’ proposals have elicited reactions from several crypto industry analysts. Adhering to this letter, Matt Hougan, Chief Investment Officer at Bitwise, suggests that Bitcoin ETFs could prompt US authorities to reconsider their stance concerning the overall crypto regulation.