During a speech on September 9, Paul Munter, the chief accountant for the United States Securities and Exchange Commission (SEC), seemed to revise the agency’s stance on Staff Accounting Bulletin-121 (SAB-121), which restricts banks from offering digital asset custody services to their clients.
An analysis by Alex Thorn, head of research at Galaxy, highlighted that Munter introduced exemption criteria that could allow bank holding companies and introducing brokers to bypass the custody regulations specified in SAB-121.
Banks can sidestep the reporting obligations associated with SAB-121 if they secure written consent from state regulators, manage client assets in a “bankruptcy remote” fashion, establish clear terms in their contracts, and perform regular risk assessments.
Similarly, introducing brokers can exempt themselves from SAB-121’s stipulations by adhering to three specific criteria: they must not hold client private keys, cannot act as third parties in transactions, and must not serve as agents of the introducing broker. Additionally, they must acquire a legal opinion affirming their status as an exempt introducing broker for digital assets.
A letter from Wyoming Senator Cynthia Lummis dated May 2024 urged President Biden not to reverse the repeal of SAB-121. Source: US Congress
Thorn noted that these exemptions could significantly reduce the number of entities originally subjected to the reporting requirements of SAB-121. However, it’s likely that large national banks, which fall under the jurisdiction of the Office of the Comptroller of the Currency (OCC), will not qualify for the SAB-121 exemptions and will need to petition the SEC directly for any relief.
Despite these constraints for major nationally-chartered banks, Thorn ultimately viewed the relaxation of SAB-121 provisions as a favorable shift for the cryptocurrency sector and the broader acceptance of digital assets.
In a statement to Cointelegraph, Thorn remarked, “It’s conceivable that the SEC never intended for SAB-121 to apply to banks.” He further suggested that these regulations might have been introduced “punitively” to target the cryptocurrency industry and digital asset markets.
Related:
SEC ‘dug in’ on bank crypto custody rule as agency’s stance ‘unchanged’
Staff Accounting Bulletin-121
The SEC initially established SAB-121 in 2022 and faced increasing pressure from U.S. lawmakers to repeal these regulations by February 2024.
In May, the United States House of Representatives voted to overturn the SEC’s SAB-121 reporting rules by a margin of 46 votes.
President Joe Biden’s response to the SAB-121 repeal. Source: White House.
Nevertheless, President Joe Biden exercised his veto against the repeal, asserting that revoking SAB-121 would compromise the SEC’s role as an effective financial regulator.
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