Banks feel FOMO as SEC rules keep them out of crypto custody

Happy Friday. Earlier this week, I dropped by the Milken Institute's swank annual conference in Los Angeles, where I met with State Street's chief product officer Donna Milrod. She has an impressive knowledge of Wall Street history and, in particular, of the business of custody—the unflashy but vital task of holding onto customer assets and keeping them safe. Milrod also made clear that State Street, which is the second oldest bank in the U.S., is keen to get into the crypto game.

"We're raring to go," Milrod told me, making a case why her bank—which is the largest custodian in the world—would be the best and safest choice to safeguard the billions of dollars worth of Bitcoin held by big financial players like BlackRock. Unfortunately, when the SEC granted approval to BlackRock and 10 others to launch Bitcoin ETFs in January, State Street was on the outside looking in—instead, it was crypto incumbent Coinbase who got the custody assignment for all but one of the new funds.

The reason for State Street sitting out the custody game is—stop me if you've heard this one before—unusual regulatory choices by the SEC. Specifically, the agency has published guidelines that say, for accounting purposes, firms must list crypto assets held on behalf of others as both assets and liabilities on their balance sheets. You don't need to be an accountant to realize there is something odd about this, especially as non-crypto assets held in custody don't go on a balance sheet at all. A former State Street executive even went so far as to describe the rule as "insane."

The frustration is understandable. Even though the accounting rule means holding crypto is a wash (since the assets and liabilities offset), it is a problem for banks since the capital cushions they must hold are determined by the size of their balance sheet. It's another example of Gary Gensler's SEC attempting to throttle crypto by any means necessary, even if it means playing fast and loose with the letter of the law.

While these sorts of tactics are keeping the likes of State Street out of crypto for now, it feels the SEC is fighting a losing battle. Banks are adopting blockchain technology at a rapid clip and it's a matter of time until elements of crypto are integrated into all parts of the financial system. Meanwhile, crypto advocates are chipping away at Gensler's regulatory obstruction in the courts and in Congress. This week, for instance, the House passed a bill to chuck out the SEC's oddball custody interpretation (known as SAB 121) with the support of 21 Democrats—whose average age is nearly half that of the party's leader. It's a matter of time.

If you'll be in New York this week and are interested in the rapidly evolving world of finance, I will be co-chairing the Fortune Future of Finance: Technology and Transformation summit at the Park Hyatt next Thursday. The event will feature senior executives from companies ranging from BlackRock to PayPal to Coinbase, and feature a special dinner keynote on finance and the 2024 election with Anthony Scaramucci and Andrew Yang. There are a few tickets left—you can find out more here. Have a great weekend.

Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts

This story was originally featured on Fortune.com