Paul Munter, the Chief Accountant of the United States SEC, seemingly dialled back to ease the tough criteria of the SEC’s Staff Accounting Bulletin-121 (SAB-121) during a speech. SAB-121 has been a considerable regulatory barrier, especially for banks trying to provide crypto custody services.
Munter’s comments imply a possible way for banks to avoid the strict standards that SAB-121 imposes, which up to now have prevented institutions from obtaining such services. SAB-121, which was the SEC’s introduction in 2022, obliges public companies to account for the crypto assets held for clients on their balance sheets. This regulation is a significant danger as it may expose custody clients to unsecured creditors if a custodian is bankrupt.
This stipulation has never ceased being a serious headache for the lenders, equally various of them are publicly traded companies, plus meeting other capital rules requirements to hold a 1:1 cash reserve for any crypto assets under custody.
Some of Munter’s remarks, on the other hand, seem to give some banks comfort. He indicated that the SEC hasn’t objected to a bank’s decision that the balance sheet accounting requirements of SAB-121 don’t apply in its case, which provides a roadmap for some institutions. In particular, Munter identified two fact scenarios in which banks and brokers could avoid falling under the grip of SAB-121.
Implications for the Crypto Custody Market
Banks could get the SAB-121 exemption if they get written permission from the state prudential regulator and follow other regulatory conditions; the bank’s crypto assets are secured in a “bankruptcy-remote” way. At the same time, brokers who introduce themselves may also obtain solace from meeting the conditions, such as not possessing the cryptographic keys to client assets and having legal opinions substantiating their position.
Munter’s statements together entail very big effects. Even though state banks can escape the obligations of SAB-121, institutional investors might find the banks involved in the crypto custody and custody sector very soon. On the other hand, nationally chartered banks have to deal with the SEC on a one-to-one basis, which makes the situation more complex.
This is an encouraging development for state banks. Nevertheless, Munter’s speech indeed arouses some worries. Is it possible that the SEC has not yet revised or revoked SAB-121? Congress passed the law claiming that the SEC had violated the Administrative Procedures Act by issuing SAB-121 without following the required formalities.
The continuous informal guidance and loopholes are clear examples of the SEC’s lack of will to participate in the transparent rulemaking process, leaving the crypto industry in the regulatory uncertainty.
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