Banks Get Green Light to Hold Crypto as SEC Axes Rule

The U.S. Securities and Exchange Commission (SEC) has taken a significant step towards fostering a more crypto-friendly regulatory environment by rescinding Staff Accounting Bulletin (SAB) No. 121. This move, announced on Thursday, allows banks and financial institutions to custody digital assets without the onerous accounting requirements previously imposed. The new guidance, SAB 122, permits financial institutions to manage clients' crypto holdings, marking a major shift in the SEC's approach to crypto regulation.

SAB 121, introduced in March 2022 under former SEC Chair Gary Gensler, required institutions holding crypto assets for customers to record those holdings as liabilities on their balance sheets. This accounting standard created operational and financial burdens for banks, effectively discouraging them from offering crypto-related services. The rule was widely criticized by the crypto industry and lawmakers, with SEC Commissioner Hester Peirce famously calling it a "pernicious weed" in April 2023.

The rescission of SAB 121 comes just days after Gensler's resignation and marks the start of a new era under Republican leadership. Acting SEC Chair Mark Uyeda, who assumed the role on Monday, quickly announced the formation of a crypto task force led by Peirce to craft clearer and more practical regulatory frameworks for the industry.

With the removal of SAB 121, major banks are now expected to move swiftly to integrate crypto custody services into their offerings. This is a significant milestone in the financialization of bitcoin, bringing it closer to mainstream adoption. The crypto community has become euphoric with this news, and crypto companies are likely to see major growth in the country as a result of this shift in US crypto regulations.

However, banks may still face potential risks and challenges when offering crypto custody services. These include market volatility, regulatory uncertainty, security risks, reputation risk, and operational risks. To mitigate these risks, banks can diversify their crypto holdings, use hedging strategies, invest in robust cybersecurity measures, implement strong internal controls, and maintain transparency in their operations.

In conclusion, the SEC's rescission of SAB 121 and introduction of SAB 122 have created a more favorable regulatory environment for banks and financial institutions to offer crypto custody services. This change is expected to increase competition in the market, attract more clients, and encourage innovation and differentiation among banks. As the crypto industry continues to grow and evolve, it is crucial for regulators to adapt and create clear, practical guidelines that support the responsible development of the sector.