SEC Chair Gary Gensler’s Obscure Rule Limits Banks’ Custody of Bitcoin, Ethereum, Ripple (XRP) and Crypto

• SEC’s Staff Accounting Bulletin No. 121 (SAB 121) is revealed as a barrier to banks in the U.S. from providing cryptocurrency custody services.
• Criticisms are rampant against SAB 121, which is viewed as a tool transforming the SEC into a ‘merit regulator’.

Cryptocurrency circles were jolted as Matt Walsh, a partner at Castle Island Ventures, unveiled how a little-known SEC rule has become a stumbling block for U.S. banks aiming to offer Bitcoin and other cryptocurrencies custody services. This regulation, termed Staff Accounting Bulletin No. 121 (SAB 121), has been operational since March 31, 2022, sparking widespread debate over its intent and implications.

The Unseen Hand: SAB 121’s Influence on Crypto Custody

Walsh utilized Twitter to highlight the gravity of this restrictive rule. He asserted that Gary Gensler, the SEC chairperson and a significant player in Elizabeth Warren’s anti-crypto crusade, is utilizing SAB 121 to metamorphose the SEC into a ‘merit regulator.’ Concurrently, this accounting rule is effectively stonewalling major banks from engaging with cryptocurrencies within the United States.

So, what does SAB 121 entail? Instituted by the SEC in March 2022, this rule targets entities filing financial data with the SEC under U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and having a safeguarding obligation for crypto assets. Its fundamental requirement is for these entities to acknowledge a liability on their balance sheets and a parallel asset under ASC 805, Business Combinations.

The bone of contention is how SAB 121 compels banks offering Bitcoin custody services to account for their customers’ Bitcoins as their own assets. This necessitates maintaining more U.S. dollars as a capital charge against the asset, a departure from how custodians usually manage other asset classes.

This rule is already leaving an imprint on major financial institutions. Bank of New York Mellon (BNY) expressed concerns in their letter to the SEC about SAB 121 rendering their crypto business untenable, questioning why the SEC is undermining their crypto custody enterprise.

Ripple Effect on the Cryptocurrency Sphere

In their commentary, Anchorage highlighted that SAB 121 appears to be thwarting BNY’s custody offering from materializing. It’s clear that this rule is obstructing the development of credible and regulated firms, hindering them from supplying much-needed services within the cryptocurrency market.

The protest against SAB 121 extends beyond industry confines. Senator Cynthia Lummis and Congressman Patrick McHenry have sought explanations, stressing that this guidance could deter banks and credit unions from providing Bitcoin and cryptocurrency custody services. Even inside the SEC, Commissioner Hester Peirce publicly voiced her disagreement with the guidance.

Walsh boldly asserts that this maneuver serves the agenda of Senator Elizabeth Warren, known for advocating stronger regulation and control over the digital asset industry. If these allegations ring true, it raises serious concerns about the decision-making power of unelected officials like Gary Gensler, who now wields influence over Bitcoin and crypto policy in the U.S.

The U.S. Congress needs to promptly address this urgent issue to safeguard the growth and innovation of the industry. As Walsh concludes, repealing SAB 121 should be a high priority, along with passing a digital asset market structure bill and a stablecoin bill, to set up a supportive regulatory framework that balances growth and consumer protection. At the time of writing, the Bitcoin price was at $30,092.

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