Senate votes to abandon SEC’s controversial cryptocurrency custody policy. Here’s why everyone hates SAB 121 – DL News

• The SEC’s SAB 121 accounting guidance has angered crypto proponents.
• But why did senators, investors and defenders of the banking sector oppose this measure?

Thursday, the Senate I will vote on a resolution to repeal the Securities and Exchange Commission’s controversial accounting guidelines, which critics say have dissuaded investment banks from offering custody of cryptocurrencies on a large scale.

The block reported there is apparently enough bipartisan support to see the measure pass.

This will appeal to a multitude of interests – legislators, investment banks, crypto investors and crypto skeptics – who generally agree on very little.

Everyone would like to see SEC Staff Accounting Bulletin 121, known as SAB 121, scrapped, saying the guidelines require banks to treat crypto differently from other assets.

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

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

Missing the ETFs

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

ETF issuers pay custodians, often banks, to protect the asset underlying the fund.

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BNY Mellon, JPMorgan and State Street all have significant custody operations in the United States.

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

That’s at least in part thanks to SAB 121, a “de facto crypto custody rule that really shut out custodians,” Tuffy said.

The second published SAB 121 in March 2022. It advises any entity protecting crypto assets on behalf of others to record them on its balance sheet as if it owned them.

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

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

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

SAB 121 doesn’t specify exactly how much banks should hold in crypto assets, or whether the SEC would even enforce it — it’s not a rule per se, just a piece of high-level guidance.

But the uncertainty alone is said to have deterred a number of large companies, including BNY Mellon, State StreetAnd Nasdaq – to enter this company.

Why is it a problem?

Lawmakers like Republican Mike Flood, who supports anti-SAB Resolution 121, say excluding heavily regulated and experienced 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 a single provider. Coinbase manages custody of eight of the 10 ETFs, or about 90% of the Bitcoin contained in these funds.

“It’s just a really strange situation and a good example of how the SEC has gotten a little bit knotted with its legal pressure against crypto.”

—Sean Tuffy

However, this puts SAB 121 in direct contradiction to SEC Chairman Gary Gensler’s position that existing regulations are adequate to control crypto markets, Tuffy said.

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

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

“It’s just a really strange situation and a good example of how the SEC has gotten a little bit knotted with its legal push against crypto,” Tuffy said.

Pressure to repeal

Gensler appears unwilling to abandon SAB 121.

He likely thinks this addresses the risks that SEC staff see in crypto markets — a position bolstered by the huge losses caused by the bankruptcies of crypto companies like FTX and Celsius.

But he is under pressure to cancel it, or at least to allow the public to have their say.

The Government Accountability Office, the watchdog agency of the United States Congress, said in October that SAB 121 amounts to a rule and should be subject to the statutory public comment process.

And then there is the powerful banking lobby. Influential trade associations like the Securities Industry and Financial Markets Association called for investment banks should be excluded from SAB 121.

Gensler, however, has the American 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 crypto-assets would introduce significant financial instability and market uncertainty. » Biden said.

Contact the author at joanna@dlnews.com.

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