Almost two years ago, the Securities and Exchange Commission (SEC) introduced Staff Accounting Bulletin (SAB 121) relating to digital asset custody. It requires assets to appear on the custodian’s balance sheet, a very unorthodox accounting treatment. Now major banking and securities industry bodies – ABA, SIFMA, BPI and FSF * – have written a letter to the SEC. They’re asking for amendments to the bulletin’s requirements.
They request that the rule not cover all crypto-assets and ask for it to exclude use cases that combine DLT and traditional assets. In other words, they want digital securities excluded, even if cryptocurrencies stay in.
“SAB 121 will have a chilling effect on banking organizations’ ability to develop responsible use cases for distributed ledger technology (DLT) more broadly,” the letter states.
That’s because bank capital requirements are based on the balance sheet. The more assets, the more capital has to be set aside.
Secondly, they request that the balance sheet requirement is removed for banks. They’re happy to disclose the amounts of crypto-assets held in custody as a note.
The letter also states, “Digital asset custodial services are currently offered by various non-banking organizations, thereby keeping activity outside the prudential perimeter and avoiding the necessary oversight by regulators.”
One of the SEC’s primary missions is to protect consumers, but SAB 121 has the opposite effect with Bitcoin ETFs. The letter highlights that SAB 121 prevented regulated banks from providing Bitcoin custody for the recent Bitcoin ETF launches. The two largest ETFs from BlackRock iShares and Fidelity now have a combined $8.3 billion assets under management. Coinbase provides custody for most of the ETFs (not Fidelity’s), creating a concentration risk.
Congress opposition to SAB 121
Meanwhile, the Government Accountability Office (GAO) ruled in November that Congress should have reviewed SAB 121. Last week there was meant to be a vote on a Congressional resolution to cancel SAB 121. We don’t believe that vote happened, but we have contacted legislators to confirm.
* The associations are the Bank Policy Institute (BPI), American Bankers Association (ABA), Financial Services Forum (FSF) and the Securities Industry and Financial Markets Association (SIFMA).
