TL;DR
- The SEC is adopting a more flexible approach regarding SAB 121, allowing some banks to custody cryptocurrencies under certain conditions.
- Despite failed legislative efforts to eliminate SAB 121, the regulator has authorized several large banks to bypass stricter requirements since 2023.
- The change reflects a response to the growing institutional interest in the crypto industry and follows the approval of the first Bitcoin Spot ETFs in January and the anticipation of Ethereum Spot ETFs.
The United States Securities and Exchange Commission (SEC) is adopting a more flexible approach regarding the controversial measure SAB 121. The entity is facilitating banks in the country to custody cryptocurrencies like Bitcoin on behalf of their clients. The change comes after intense debates and failed legislative attempts to eliminate the rule.
Issued two years ago, the SAB 121 bulletin required companies that custody cryptocurrencies to record clients’ holdings as liabilities on their balance sheets. This measure, which aimed to protect investors after the bankruptcies of several crypto companies, had been controversial due to the difficulties it imposed on banks to custody these assets.
Despite efforts by some U.S. legislators to eliminate the rule, the presidential veto in May and the lack of necessary votes to overturn that veto kept the measure in force. However, the SEC seems to be adjusting its policies internally. According to a Bloomberg report, several large banks in the country have been authorized since 2023 to bypass the strict requirements of SAB 121, as long as they implement adequate measures to mitigate the risks associated with cryptocurrencies. These safeguards include asset protection measures in the event of bankruptcy and strong internal controls.
Finally, the SEC Gives in to Pressure
The change in the SEC’s stance could be interpreted as a response to the growing interest of financial institutions in the crypto market. Institutional demand has grown exponentially following the approval of the first Bitcoin Spot ETFs in January. Additionally, investors are awaiting the debut of the first Ethereum Spot ETFs, a product that received the green light in May.
Negotiations between financial entities and the SEC have been crucial for this change. These have been behind closed doors and have allowed the SEC to consider that the initial guidance of SAB 121 has achieved its goal. Financial companies have adequately adjusted to address the threats of hacking and commercial failures, leading the regulator to relax its stance.
The regulator is showing greater flexibility in its policies regarding the custody of cryptocurrencies by banks, in response to both legislative pressure and growing institutional interest. The regulatory evolution is a significant advance, although there is still much progress to be made.
