Major banks and financial institutions are urging the SEC to revise its crypto asset regulations, aiming to play a big role as custodians for newly approved spot Bitcoin ETFs. A coalition, including the Bank Policy Institute and American Bankers Association, specifically highlighted challenges posed by the current guidance, particularly Staff Accounting Bulletin 121, which requires crypto assets to be held on balance sheets, thus hindering banks' ability to offer crypto custody services. They propose modifications to ease these restrictions, amidst a backdrop where Bitcoin ETFs have seen over $4 billion in inflows. Meanwhile, MicroStrategy's potential inclusion in the S&P 500 could further mainstream Bitcoin investment, as its stock rally brings it closer to meeting the index's criteria, potentially leading to increased Bitcoin exposure through a number investment vehicles.
Big Finance's Bid for a Slice of the Bitcoin ETF Action
Major banks and financial institutions have started a push for the Securities and Exchange Commission (SEC) to reconsider its stance on the definition of crypto assets. This initiative, spearheaded by a coalition of influential trade groups including the Bank Policy Institute, American Bankers Association, Financial Services Forum, and Securities Industry and Financial Markets Association, aims to facilitate a much larger role for banks in the crypto market, particularly in acting as custodians for the newly approved spot Bitcoin exchange-traded funds (ETFs).
The coalition's appeal to the SEC, articulated in a letter addressed to Chair Gary Gensler on Feb. 14, refers to the recent authorization of 11 spot Bitcoin ETFs in the U.S., and points out the very obvious absence of American banks as asset custodians for these products. This is a deviation from the norm, as banks typically serve as custodians for most other exchange-traded products (ETPs).
The letter pointed out that the current regulatory guidance under Staff Accounting Bulletin 121 (SAB 121), issued in March of 2022, imposes major challenges for banks wishing to provide crypto custody services at scale. Specifically, the guidance necessitates that banks hold crypto assets on their balance sheet, a requirement that not only racks up massive costs but also limits their capacity to offer these services extensively.
In response to these challenges, the trade groups have proposed several modifications to the existing guidance. Primarily, they advocate for a narrower definition of crypto assets in SAB 121 to exclude traditional assets that are recorded on the blockchain, like tokenized deposits, from the stringent crypto regulations. Moreover, they suggest exempting banks from the on-balance sheet holding requirements while retaining disclosure obligations. This adjustment would allow banks to take part in certain crypto activities.
The push by these financial institutions suggests a major shift in the regulatory dialogue surrounding crypto assets in Washington, according to Bitwise chief investment officer Matt Hougan. This sentiment is echoed by others in the industry, including Bloomberg ETF analyst Eric Balchunas and the author of the Bitcoin weekly newsletter, who perceive this move as indicative of the banking sector's growing interest in embracing digital finance and the lucrative opportunities presented by Bitcoin ETFs.
Despite the outflows experienced by Grayscale, the appeal by the banks comes at a time when the total aggregate inflows to the newly launched spot Bitcoin ETFs have surpassed $4 billion.
Bitcoin's Leap into Mainstream Portfolios via MicroStrategy's S&P Bid
There are other ways for more people to get their slice of the Bitcoin pie. MicroStrategy, the largest corporate holder of BTC, is on a path that could potentially lead to its inclusion in the S&P 500 index, an achievement that would bring Bitcoin exposure to a wide array of investment portfolios. Recently, MicroStrategy's stock performance saw a remarkable rally of 46% over an eight-day trading period, propelling the company to the 535th position among the largest publicly listed companies in the United States as of Feb. 15.
For a company to be eligible for inclusion in the S&P 500, it must meet some strict criteria. These include a minimum market capitalization of $15.8 billion, a requirement that MicroStrategy is approaching with its current market cap of $12.1 billion. Additionally, the company has to demonstrate profitability over the last four quarters, including the most recent one, alongside a minimum trading volume of 250,000 shares in the past six months, with a majority of its shares publicly held.
MicroStrategy meets many of these requirements, including the profitability criterion. However, to reach the necessary market cap for S&P 500 inclusion, its stock price would need to increase from its current level to $937, assuming all of the other factors stay constant. Despite these hurdles, the potential inclusion of MicroStrategy in the index could have far-reaching implications for Bitcoin exposure across various investment vehicles, including ETFs, pension funds, and traditional 401k plans.
The S&P 500 is a huge benchmark in the financial world. Inclusion in the index could lead to MicroStrategy's automatic inclusion in nearly every ETF portfolio tracking the S&P 500, thus indirectly increasing Bitcoin's presence in these portfolios. With the three largest ETFs by assets under management being tied to the S&P 500, MicroStrategy's inclusion could result in a passive capital allocation of approximately $12 billion, based on its 0.01% weighting in the index fund.
This development comes as MicroStrategy's founder and chairman, Michael Saylor, announced a strategic shift for the company, transitioning from a business intelligence firm to a "Bitcoin development firm." Holding approximately 190,000 BTC, MicroStrategy has greatly benefited from its Bitcoin investments. Along with ETFs, the potential S&P 500 inclusion could further solidify Bitcoin's position in mainstream investment strategies.
