The Senate votes to end the SEC’s controversial cryptocurrency custody policy. See why everyone hates SAB 121 – DL News

• The SEC’s SAB 121 accounting guidance has infuriated crypto supporters.
• But why did senators, investors and banking sector defenders attack it?

On Thursday, the Senate will vote in a resolution to revoke controversial accounting guidance from the Securities and Exchange Commission, which critics say has dissuaded investment banks from offering large-scale crypto custody.

The block reported There apparently is enough bipartisan support to see the measure passed.

This will please a range of interests – policymakers, investment banks, cryptocurrency investors and cryptocurrency skeptics – who often agree on very little.

Everyone would like to see the SEC staff’s Accounting Bulletin 121, known as SAB 121, scrapped, saying the guidance forces banks to treat crypto differently than other assets.

“Even I think rewriting the rules for how crypto custody works is outrageous,” said Sean Tuffy, a banking regulation expert and self-confessed crypto skeptic. DL News.

So what is SAB 121 and why is there so much anger surrounding a mysterious banking compliance issue?

Losing ETFs

Let’s look at exchange-traded funds to understand the impact of SAB 121.

ETF issuers pay depositories, often banks, to safeguard the fund’s underlying asset.

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BNY Mellon, JPMorgan and State Street have large custody businesses in the US.

So why, when it comes to spot Bitcoin ETFs, are none of these names involved? If you look at the bottoms prospectsyou will see Coinbase, Gemini, BitGo, and Fidelity listed as custodians.

This is due, at least in part, to SAB 121, a “de facto crypto custody rule that actually excluded custodians,” Tuffy said.

The second Published SAB 121 in March 2022. Advises any entity that secures crypto assets on behalf of others to place them on its balance sheet as if it owns them.

They don’t need to do this with traditional assets like stocks.

Like other too-big-to-fail banks, depositors must hold capital reserves to offset risky balance sheet items so that they can finance their positions in the event of default.

This is expensive: the capital they are forced to keep in reserve could be used to generate revenue.

SAB 121 is unclear about how much banks would have to withhold against crypto assets, or whether the SEC would even enforce it – it’s not a rule per se, just high-level guidance.

But the uncertainty alone has deterred a number of big companies – including BNY Mellon, State StreetIt is Nasdaq – to enter this business.

Why is this a problem?

Lawmakers like Republican Mike Flood, who supports the anti-SAB 121 resolution, say excluding experienced and heavily regulated banks from the cryptocurrency custody business puts investors’ assets at risk.

Part of this risk comes from the fact that most of the Bitcoin underlying spot ETFs is concentrated in one vendor. Coinbase handles custody of eight of the 10 ETFs, or about 90% of the Bitcoin in those funds.

“It’s a very strange situation and a good example of how the SEC has gotten a little involved with its all-out legal push against crypto.”

-Sean Tuffy

However, this puts SAB 121 directly at odds with SEC Chairman Gary Gensler’s position that existing regulations are adequate to police crypto markets, Tuffy said.

“If that’s true, and I’m inclined to believe it is, then why would the SEC need to create very different custody rules for crypto?” -Tuffy said.

SAB 121 essentially transfers custody of Bitcoin ETFs to Coinbase, which the SEC is actively prosecuting for violations of securities laws.

“It’s a very strange situation and a good example of how the SEC has gotten a little involved with its all-out legal push against crypto,” said Tuffy.

Pressure to revoke

Gensler appears unwilling to discard SAB 121.

He likely believes this addresses the risks the SEC staff sees in crypto markets – a position reinforced by the huge losses caused by bankruptcies of crypto firms like FTX and Celsius.

But he is under pressure to overturn it, or at least allow the public to have a say in the matter.

The Government Accountability Office, the oversight body of the US Congress, said in October that SAB 121 constitutes a rule and must be submitted to the legal process of public consultation.

And then there is the powerful big banking lobby. Influential trade associations, such as the Securities Industry and Financial Markets Association have called investment banks will be excluded from SAB 121.

Gensler, however, has the U.S. President Joe Biden in his corner. Biden said he would veto Flood’s resolution if it passed the Senate.

“Limiting the SEC’s ability to maintain a comprehensive and effective financial regulatory framework for cryptoassets would introduce substantial financial instability and market uncertainty,” Biden said.

Contact the author at joanna@dlnews.com.

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