The SEC’s directive that customers’ digital assets may need to be treated as belonging to an exchange’s balance sheet has banking regulators scratching their heads about how it’ll work.

U.S. Federal Reserve Chairman Jerome Powell said on Wednesday that a recent, much-debated move by the Securities and Exchange Commission (SEC) has thrown a potential wrench into common practice for how the U.S. central bank and banking regulators view digital assets held by lenders. Powell’s remarks came in testimony on monetary policy before the Senate Banking Committee.

In an accounting directive – the innocuous-sounding Staff Accounting Bulletin No. 121 – to public companies, the SEC had advised firms holding customers’ digital assets that they’d need to consider those assets as belonging to the companies’ own balance sheets. This move spurred Coinbase (COIN) to declare in a public filing that customers’ assets may be caught up with the company’s in a hypothetical bankruptcy. That admission caused some fear among customers, though the company argued it wasn’t a signal about the company’s health.

“Custody assets are off balance sheet, have always been,” Powell told the Senate Banking Committee. “The SEC made a different decision as it relates to digital assets for reasons it explained, and now we have to consider those.”

As it relates to the banks the Fed oversees in the U.S., Powell said the SEC’s interpretation is “certainly something we’re focusing on very closely right now,” adding that his agency is working with other banking regulators to figure out how it might change the way they assess lenders that keep cryptocurrencies.

After the filing from Coinbase, the Biden administration began pushing behind the scenes to insist that future legislation require legal walls to protect customers’ digital assets. And another incident – the drama at Celsius Network, the crypto lending platform that halted customer withdrawals last week – threw a spotlight on the problem of shielding customers’ money.

Republican lawmakers in the U.S. have argued that the securities regulator overstepped with its staff bulletin, which they say amounts to new, back-door regulation.

Source: coindesk.com

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