While Bitcoin prices continue to reach new highs, Coinbase, a prominent cryptocurrency exchange, has reported impressive financial results. These developments may seem unrelated to the traditional banking industry, which is primarily associated with custodial services. However, American banks cannot ignore these trends anymore.
During the Chinese New Year period, while people were immersed in festive celebrations, the cryptocurrency market remained highly active. Bitcoin, in particular, experienced a significant surge. On February 14th, Bitcoin broke the $50,000 mark and reached its highest level since December 2021, hovering around $51,000.
Meanwhile, Coinbase, one of the leading cryptocurrency exchanges, announced its Q4 financial report. The company reported a revenue of $954 million for Q4, marking its first profitable quarter in two years. Coinbase’s assets under custody reached $100 billion by the end of the year, with $7 billion flowing into its custody services. The CEO revealed that Coinbase currently holds 90% of the Bitcoin ETF assets, amounting to $37 billion. However, this income was not accounted for in the Q4 report and will contribute to future revenue in the 2024 fiscal year.
The surge in Bitcoin prices and the corresponding institutional interest have caught the attention of traditional banks in the United States. Custodial services related to cryptocurrency assets are a significant source of income for many banks. Until 2020, only specific custodians could offer cryptocurrency custody services, and the process was complex and required approval from national financial regulatory authorities. Banks were hesitant to enter this field due to its risks and uncertainties.
The situation changed on July 22, 2020, when the Office of the Comptroller of the Currency (OCC), a subsidiary of the U.S. Department of the Treasury, issued a public letter affirming the legal rights of national banks and federal savings associations to provide cryptocurrency custody services. Following this announcement, several banks, including the Bank of New York Mellon, began venturing into cryptocurrency custody services.
However, after the FTX incident in 2022, U.S. authorities realized the potential systemic risks associated with cryptocurrencies and tightened regulations. The three major federal banking regulatory agencies released a joint statement highlighting the risks of cryptocurrency assets to banking institutions, suggesting that banks should refrain from engaging in cryptocurrency-related businesses. In January 2023, the Federal Reserve Board (FRB) rejected the membership application of a cryptocurrency-focused custodial bank. Since then, the banking industry has been cautious and skeptical about cryptocurrency assets and their risks within the financial system, until the recent approval of Bitcoin ETFs.
On February 14, 2024, the chairman of the Securities and Exchange Commission (SEC), Gary Gensler, received a letter from various banking organizations urging the modification of Staff Accounting Bulletin (SAB) 121, which imposes certain accounting requirements on financial institutions providing cryptocurrency custody services. These requirements include including cryptocurrency assets as liabilities on the balance sheet, increasing the cost of custody services and violating the principle of asset neutrality.
While the SEC maintains that accounting guidance is necessary to address the unique risks and uncertainties associated with cryptocurrency assets, the banking industry believes that these requirements hinder their ability to offer digital asset protection services at a large scale, potentially negatively impacting investors, clients, and the overall financial system.
Although the outcome of this dispute is still uncertain, it is evident that U.S. banks are now more eager to participate in Bitcoin ETF custody services to gain custody fees and other potential revenue. The involvement of established banks in the cryptocurrency industry can have positive effects, including improved security and transparency for custodial services and increased mainstream adoption of cryptocurrency assets. Banks have always been a vital part of the financial system, and their entry into the cryptocurrency space will lower barriers to entry and expand access for the general public.
While it may take time to adjust accounting regulations, the banks’ actions can be seen as an opportunistic move. As Bitcoin becomes increasingly mainstream, it is expected that the dominance of Coinbase as the sole custodian will diminish, leading to greater diversity in custodial services. Overall, the involvement of traditional banks will contribute to the development of the cryptocurrency industry and make it more accessible to the general public.
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