The Securities and Exchange Commission’s (SEC) recent reversal of its cryptocurrency custody accounting guidance marks a potential watershed moment for retail investor access to digital assets. By rescinding Staff Accounting Bulletin 121 (SAB 121), which required financial institutions to maintain matching assets for customer crypto-holdings on their balance sheets, the SEC removed a significant barrier that kept many banks and wealth managers on the crypto sidelines.
The original March 2022 guidance created operational hurdles and capital constraints for financial institutions. Banks faced the daunting prospect of essentially double-counting crypto-assets on their balance sheets—once for the customer holdings they custody and again for their matching reserves. This accounting treatment made crypto-custody services prohibitively complex and capital-intensive for many institutions, effectively limiting retail investors’ access to regulated crypto-custody options.
Though this regulatory shift is barely a week old, it has already set planning wheels in motion. However, banks and other wealth managers looking to enter the crypto-custody space still face important strategic and operational challenges. Any bank considering crypto-custody services must first develop a robust infrastructure for securing and managing private keys—the cryptographic equivalent of vault combinations protecting access to digital assets.
The regulatory landscape around crypto-custody also remains complex, even with the reversal of SAB 121. Banks must still observe comprehensive Bank Secrecy Act and anti-money laundering requirements to prevent illicit activity. They have ongoing obligations to protect consumers through clear disclosures, transaction monitoring capabilities, and audit trails. Additionally, prudential banking regulations still apply to novel activities like crypto-custody, requiring careful risk assessment and management frameworks.
Despite these continuing considerations, the SEC’s policy reversal represents a significant opening for regulated financial institutions to expand their digital asset offerings. This shift could ultimately make crypto-custody services more accessible to retail investors through their existing banking relationships, reshaping how mainstream investors interact with digital assets.
Look Before You Leap
Some of the technology-related areas firms will have to consider before getting into the retail crypto business are listed below:
Infrastructure and Security
- Secure cold/hot wallet infrastructure for private key management
- Multisignature authorization protocols
- Possible use of a subcustodian specializing in digital assets
- Cybersecurity frameworks specifically for digital assets
- Disaster recovery and business continuity plans
- Integration with existing banking systems and core processors
Risk Management
- Transparent policies for handling forks, airdrops, and staking
- Insurance coverage for digital assets
- Counterparty risk assessment for any third-party custody providers
- Liquidity risk management for supporting client transactions
- Clear segregation of customer assets from bank assets
- Process to move cash or for extension of credit
- Development of a pricing policy (e.g., timing, sources)
- Deciding whether to permit self-directed accounts solely for digital assets
- Determining what fees can be charged
- Establishing how transparency is enabled
Operations
- Staff training and expertise in digital assets
- Customer service protocols for crypto-specific issues
- Reconciliation processes between blockchain and internal records
- Clear procedures for handling technical issues like stuck transactions
- Valuation methodologies for different crypto-assets
Don’t Forget About the Customer Experience
Technology and compliance considerations aside, the customer experience design for cryptocurrency custody services represents a critical bridge between traditional wealth management and digital assets. The integration must prioritize intuitive portfolio visualization that places crypto-holdings in context alongside conventional investments, providing a cohesive view of the client’s complete wealth picture. Statements must be formatted in a way that speaks to client needs and concerns, for example, by asset classification or valuation.
Developing sophisticated yet comprehensible risk- and fee-disclosure frameworks is paramount to this design. These must strike a delicate balance between regulatory requirements and user understanding, presenting complex information in digestible formats that promote informed decision-making. Similarly, tax reporting capabilities require careful attention to capture the unique aspects of crypto-transactions while seamlessly integrating with existing tax documentation processes.
The account structure framework should mirror familiar wealth management concepts while accommodating crypto-specific features. This includes developing tiered service models ranging from basic custody to pooled investments such as exchange-traded funds and actively managed crypto-portfolios, each thoughtfully integrated within established investment frameworks to maintain consistency with traditional wealth management approaches.
Reach out to me at [email protected] if you’d like to discuss any of the ideas put forward in this post. For an up-close look at the development of a structural and operating framework around crypto, see Datos Insights’ report, U.S. Regulatory Developments for Digital Assets: Implications for U.S. Wealth Managers, May 2022.
