The U.S. Securities and Exchange Commission (SEC) recently made a significant decision to repeal Staff Accounting Bulletin No. 121 (SAB 121), a rule that had been a source of contention within the cryptocurrency industry. This move is expected to have far-reaching implications for traditional financial institutions looking to venture into the crypto sector.
Commissioner Hester Peirce, affectionately known as “Crypto Mom” for her supportive stance on cryptocurrency, expressed her delight at the repeal of SAB 121 by tweeting, “Bye SAB 121, it was no fun.” The rule had previously mandated that banks holding cryptocurrencies for their customers must classify them as liabilities on their balance sheets, creating regulatory complexities that deterred many banks from offering crypto custody services.
SAB 121 placed stringent requirements on banks and financial institutions holding cryptocurrencies, treating them as liabilities and necessitating substantial regulatory capital reserves to mitigate potential risks. This deterred major players like BNY Mellon, a titan in asset management with $50 trillion under its purview, from entering the crypto custody arena. While the SEC may have intended to bolster consumer protection with this rule, critics, especially in the crypto realm, viewed it as a deliberate barrier to institutional involvement in digital assets.
The repeal of SAB 121 signals a more welcoming environment for traditional financial institutions to provide crypto custody services. This shift is anticipated to attract significant interest from large investors in traditional finance (TradFi) to explore opportunities in the crypto space.
James Seyffart, an ETF analyst at Bloomberg, believes that the repeal could reshape the dynamics of the crypto market. He suggests that the removal of SAB 121 not only clears the path for TradFi institutions to enter the crypto domain but also hints at a potential separation of trading and custody functions, akin to conventional stock markets.
Presently, companies like Coinbase, Kraken, and Gemini combine trading and custodial services for crypto assets, a departure from the segregation of assets overseen by exchanges like the New York Stock Exchange. Industry experts predict that the repeal could prompt a clearer distinction between trading and custodial roles in the crypto sector.
The repeal also holds implications for crypto-related exchange-traded funds (ETFs). Seyffart speculates that institutional players may show more interest in Bitcoin ETFs and other crypto products as the SEC eases its stance on crypto accounting. However, he cautions that the SEC may still scrutinize unconventional or speculative ETF practices.
As the regulatory landscape evolves, there is a growing anticipation of the SEC greenlighting a wave of new products, though certain boundaries may be put in place. Factors such as market value and asset origins could influence regulatory decisions in the future.
*Please note that this content is for informational purposes only and should not be construed as investment advice.