During a speech on Sept. 9, Paul Munter, chief accountant for the United States Securities and Exchange Commission, appeared to backpedal on the SEC’s Staff Accounting Bulletin-121 (SAB-121) measures limiting banks from providing digital asset custody services to clients.
According to an analysis from Galaxy head of research Alex Thorn, Munter provided exemption criteria that would allow bank holding companies and introducing brokers to circumvent the custody provisions laid out in SAB-121.
Banks can avoid the SAB-121 reporting requirements if they receive written permission from state regulators, custody client assets in a “bankruptcy remote” manner, outline clear standards in contracts, and conduct regular risk assessments.
Introducing brokers can also exempt themselves from the SAB-121 requirements by meeting three criteria.
The brokers cannot possess client private keys, cannot be third parties in the transaction, and cannot be agents of the introducing broker. Lastly, the introducing broker must obtain a legal opinion attesting to its status as an exempt introducing broker of digital assets.
A May 2024 letter from Wyoming Senator Cynthia Lummis asking Biden not to overturn the SAB-121 repeal. Source: US Congress
Thorn explained that these exemptions would “carve out a giant portion” of entities initially subject to the reporting requirements introduced by SAB-121. However, large national banks—which are under the control of the Office of the Comptroller of the Currency (OCC)—likely won’t be able to qualify under the SAB-121 exemptions and likely still have to appeal directly to the SEC if they want relief.
Despite these limitations for large, nationally-chartered banks, the Galaxy head of research ultimately concluded that the easing of the SAB-121 provisions was a positive development for the crypto industry and the adoption of digital assets.
In a statement to Cointelegraph, Thorn explained, “It’s possible that the SEC never intended that SAB-121 would apply to banks.” He further explained:
“As banks became interested, the full scope of the accounting standard became obvious, leading to significant pushback on the SEC. But having dug in its heals over the years, it became politically difficult for the SEC to adjust its posture.”
These measures may also have been introduced “punitively” to target the cryptocurrency industry and digital asset markets, Thorn opined.
Related: SEC ‘dug in’ on bank crypto custody rule as agency’s stance ‘unchanged’
Staff Accounting Bulletin-121
The SEC first introduced SAB-121 in 2022 and began to face mounting pressure from US lawmakers to repeal the regulations by February 2024.
In May, the United States House of Representatives elected to overturn the SEC’s SAB-121 reporting rules by 46 votes.
Joe Biden’s response to the SAB-121 repeal. Source: White House.
However, President Joe Biden vetoed the repeal. He claimed that repealing SAB-121 would have undermined the SEC's effectiveness as a financial regulator.
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