SEC Loosens SAB 121 Rules, Paving the Way for Banks to Enter Crypto Custody Market

• The SEC has provided guidance allowing banks to bypass SAB 121 crypto custody rules.
• Banks can now offer crypto asset custody by meeting specific regulatory conditions.
• This move opens doors for institutional crypto custody but raises fairness concerns for crypto-native firms like Coinbase.

The U.S. Securities and Exchange Commission (SEC) has provided new guidance that could allow banks to offer crypto asset custody services without adhering to strict accounting requirements under Staff Accounting Bulletin No. 121 (SAB 121). 

SEC Chief Accountant Paul Munter announced the new guidelines in a speech on September 9, paving the way for banks to enter the digital asset market.

Background on SAB 121

SAB 121, introduced by the SEC in 2022, requires public companies to account for digital assets held for clients on their balance sheets. The regulation poses risks for banks, as it could classify their customers as unsecured creditors if a custodian goes bankrupt. 

This rule has prevented many banks from providing crypto custody services due to additional capital requirements and regulatory hurdles.

Legislative Actions Challenge SAB 121

In May 2024, the U.S. Congress passed a bill attempting to formalize SAB 121 as a rule. However, Lawmakers argued that the SEC violated the Administrative Procedure Act by not following proper rule-making processes, such as a public comment period. 

Despite bipartisan support, President Joe Biden vetoed the bill, stating that repealing e 121 would undermine the SEC’s authority to set appropriate safeguards.

New Guidelines Offer Relief for Banks

Despite maintaining that the SEC’s stance on SAB 121 remains unchanged, Munter outlined two specific conditions under which companies might be exempt from these requirements. 

First, banks must receive written approval from a state-level regulatory authority, ensure customer assets are bankruptcy-isolated, and maintain high prudential standards in contracts. 

Second, introducing brokers can bypass SAB 121 if they do not hold customers’ crypto keys and operate with a third-party agent representing the customer.

Implications for the Crypto Market

The new guidelines could significantly impact the crypto market by allowing banks to offer qualified custody of digital assets. This opens up opportunities for institutional investors who prefer the security of bank custody for their digital assets. 

However, the guidelines also present challenges, particularly for national banks regulated by the Office of the Comptroller of the Currency (OCC), which may face hurdles in obtaining the required approvals.

While the SEC’s guidance may provide clarity, it also raises questions about the unequal treatment of different financial institutions. 

Banks able to meet the new criteria can avoid SAB 121, while others, like crypto-native companies such as Coinbase, continue to face stringent regulations. This has led to concerns about fairness and consistency in the SEC’s regulatory approach.