The U.S. Securities and Exchange Commission (SEC) has repealed Staff Accounting Bulletin No. 121 (SAB 121), a controversial crypto accounting rule that the cryptocurrency industry claimed discouraged banks from dealing in digital assets.
The decision is expected to pave the way for traditional financial institutions to participate more freely in the crypto sector.
Commissioner Hester Peirce, known as “Crypto Mom” for her pro-crypto stance, celebrated its repeal by tweeting, “Bye SAB 121, it was no fun.” SAB 121 previously required banks that held cryptocurrencies for their customers to record it as a liability on their balance sheets. This accounting practice created significant regulatory burdens, making it financially impractical for many banks to offer crypto custody services.
SAB 121, filed by the SEC team, imposed strict requirements on banks and financial institutions that hold cryptocurrencies. Unlike traditional assets like stocks and bonds, crypto assets are considered liabilities and require high regulatory capital reserves to offset potential risks.
This effectively prevented traditional banks like BNY Mellon, which manages $50 trillion in assets, from entering the crypto custody market. While some argued that the SEC had good intentions to enhance consumer protection, critics, including many in the crypto industry, saw the rule as a barrier designed to discourage institutional participation in digital assets.
With the repeal of SAB 121, traditional financial institutions now have fewer hurdles to offer crypto custody services. This change is expected to encourage large investors in traditional finance (TradFi) to step into the crypto space.
“This repeal could significantly change the dynamics of the crypto market,” said James Seyffart, an ETF analyst at Bloomberg. “The repeal not only allows TradFi institutions to enter the space, but also raises the possibility of a separation of trading and custody services, similar to the traditional stock market.”
Currently, companies like Coinbase, Kraken, and Gemini both trade and custodial crypto assets, a practice that is distinct from traditional financial markets where exchanges like the New York Stock Exchange do not oversee the assets. Experts predict that the repeal could lead to a clearer division of roles between trading and custodial providers in the crypto industry.
The repeal also has implications for crypto-related exchange-traded funds (ETFs). Seyffart noted that institutional players could become more involved in Bitcoin ETFs and other crypto products as the SEC softens its stance on crypto accounting. However, he cautioned that the SEC could still look into exotic or highly speculative ETF practices.
“There’s a growing sense that the SEC could approve a wave of new products, but they’ll probably draw the line somewhere,” Seyffart said. He speculated that factors such as market value or the origin of assets could influence regulatory decisions.
*This is not investment advice.
