SEC Ruling Allows Banks to Custody Crypto

In one of its first substantive actions affecting the cryptocurrency industry, the newly Republican-controlled Securities and Exchange Commission (SEC) withdrew a piece of guidance that effectively prohibited banks from custodying crypto for customers.

The repeal of Staff Accounting Bulletin (SAB) 121 was a barrier to banks holding crypto for customers because it “recommended” they record that crypto as liabilities on their balance sheets. That meant tying up assets held to balance those liabilities.

While a SAB is only “guidance,” it is guidance from a regulator that can make your life miserable. So, SAB 121 acted as a de facto ban on banks providing custody services for customers’ crypto holdings.

“Holding reserves against the assets held in custody is NOT standard financial services practice and I am pleased this rule was nullified,” House Financial Service Chairman French Hill said on X.

A Pernicious Weed

Calling SAB 121 a “pernicious weed” in an April speech, SEC Commissioner Hester Peirce explained that no one “can challenge these diktats because they are not final agency action, but compliance is mandatory for an entity wishing to avoid SEC delays, denials, and enforcement and examination scrutiny. So everybody silently complies.”

Peirce has long been known as “Crypto Mom” for her longstanding championship of fairer treatment for the blockchain industry. On Jan. 21, acting SEC Chairman Mark Uyeda appointed Peirce to lead a task force to establish a regulatory framework for cryptocurrency companies, something the agency refused to do under the chairmanship of now-departed Chairman Gary Gensler.

Her reaction to SAB 122, which repealed SAB 121, was to say, “Bye, bye SAB 121! It's not been fun,” in an X post.

Sen. Cynthia Lummis (R-Wyo.), the new chair of the Senate Banking Committee’s new digital assets subcommittee, said on X that “SAB 121 was disastrous for the banking industry, and only stunted American innovation and advancement of digital assets. I am THRILLED to see it repealed and get the SEC back on track to fulfilling its intended mission.”

Nor was opposition to SAB 121 limited to Republicans.

Last May, both the House and Senate passed a resolution rescinding SAB 121, only to have it vetoed by President Joe Biden.

Bankers' Support

Banks weren’t happy with SAB 121 either.

Rob Nichols, president and CEO of the American Bankers Association (ABA) “applauded” the repeal on Jan. 24, saying SAB 121 “made it harder for banks to provide consumers with safe and sound digital asset services.”

Noting in a statement that the ABA had “advocated extensively” with the SEC to withdraw the “misguided policy,” Nichols said, “allowing banks to serve as custodians for digital assets ensures that consumers won’t be left only with unsupervised, poorly regulated options to safeguard these assets going forward.”