BANKS URGE SEC TO APPLY PROVEN SAFEGUARDS TO CRYPTO CUSTODY RULES

The following information was released by the Financial Services Forum:

The Bank Policy Institute, the Association of Global Custodians and the Financial Services Forum submitted joint recommendations to the Securities and Exchange Commission yesterday to strengthen crypto custody requirements to protect customers and the financial system. Custodian banks held over $234 trillion in customer assets globally in 2024 and have an 80-year track record of safeguarding client assets by adhering to three core principles designed to protect investors: (1) segregation of client non-cash assets, (2) separation of custody from other financial activities, and (3) proper control over assets. The associations are calling for the SEC to adopt equivalent safeguards and protections for digital asset investors.

"If the SEC permits crypto firms or investment advisers to provide custody services outside of the existing qualified custodian framework, it is imperative that these custody providers be held to equally rigorous standards, including asset segregation requirements, ongoing regulatory oversight, and prudential mandates equivalent to those that currently govern qualified custodians," the associations wrote. "A failure by a crypto asset custodian, whether for financial or operational reasons, could cause immense harm not only to those whose assets were custodied, but to investors in wide swaths of the market, thereby necessitating strong investor protection."

The SEC significantly improved the crypto custody framework when, in January 2025, it rescinded Staff Accounting Bulletin 121 and restored banks' ability to serve as a trusted option for their clients. SAB 121 precluded banks from custodying crypto assets because it treated custodied assets as assets owned by the bank, thus subjecting the banks to stricter capital and liquidity requirements and regulatory expectations.

When client assets are custodied, banks segregate those non-cash assets from the custodian's proprietary assets and the non-cash assets of other clients at all times. This helps to prevent the commingling of non-cash assets and reduces the risk of conflicts of interest and financial mismanagement. It also helps to simplify the recovery of those non-cash assets in the rare event that an institution fails.

Key Recommendations:

Equal standards for all custodians. Any institution treated as a qualified custodian for crypto assets should meet the same requirements for asset segregation. It is imperative that these custody providers be held to rigorous standards, including asset segregation requirements, ongoing regulatory oversight, and prudential mandates equivalent to those that currently govern qualified custodians.

No self-custody by investment advisers. Investment advisers shouldn't be permitted to self-custody, meaning an investment adviser shouldn't hold and manage client crypto assets there needs to be a firewall.

These protections have been in place for decades and investors have come to expect these safeguards. Digital asset investors deserve the same protection as other investors, which is why banks continue to work with Congress and the Administration to further digital asset innovation across the financial system, including by:

Engaging the President's Working Group on Digital Asset Markets to remove regulatory barriers to digital asset innovation.

Supporting the elimination of policies and guidance restricting bank-crypto activities.

Addressing the need to modernize AML/KYC reporting expectations.

Examining redundancies in the bank regulatory framework to improve outcomes for all financial institutions.

Issuing federal fair access principles to prevent unfair discrimination in financial services based on political or religious beliefs.

Advocating for the SEC to rescind Staff Accounting Bulletin 121, governing crypto-custody activities.

Supporting revisions to the Basel banking prudential treatment of crypto assets.

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About BPI

The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.

About Association of Global Custodians

The Association of Global Custodians is a group of 12 financial institutions that provide securities safekeeping services and asset-servicing functions to primarily institutional cross-border investors worldwide. Established in 1996, the AGC primarily seeks to address regulatory and market structure issues that are of common interest to global custody banks.

About Financial Services Forum

The Financial Services Forum is an economic policy and advocacy organization whose members are the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, financial inclusion, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.