Written by Hazel J. Greene, Senior Analyst

Castle Island Ventures partner Matt Walsh recently highlighted the implementation of Staff Accounting Bulletin No. 121 (SAB 121) by the US Securities and Exchange Commission (SEC). This little-known accounting rule, which has been in effect since March 2022, has raised concerns about its motives and implications, particularly regarding its impact on US banks’ ability to hold Bitcoin and other cryptocurrencies.

Walsh took to Twitter to shed light on the alarming nature of SAB 121, alleging that Gary Gensler, the head of the SEC and a prominent figure in Senator Elizabeth Warren’s anti-crypto campaign, is leveraging this accounting rule to keep major banks in the United States from entering the cryptocurrency space. Walsh stated:

“SAB 121 and how Gary Gensler, the lead henchman of Elizabeth Warren’s anti-crypto army, is turning the SEC into a merit regulator and using an obscure accounting rule to prevent major banks from touching crypto in the United States.”

What Exactly Does SAB 121 Entail?

Published by the SEC in March 2022, SAB 121 applies to entities filing financial information under US Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and having a safeguarding obligation for crypto assets. Its core requirement is for these entities to recognize a liability on their balance sheets and a corresponding asset under ASC 805, Business Combinations.

The key issue lies in how SAB 121 forces banks providing Bitcoin custody services to treat customers’ Bitcoins as if they were the bank’s own assets. This means holding more U.S. dollars as a capital charge against the asset. Walsh highlights this contradictory treatment compared to how custodians typically handle other asset classes:

“This accounting treatment would be in conflict with every other asset that custodians safekeep… It makes zero sense.”

The consequences of SAB 121 are already felt by major financial institutions. Bank of New York Mellon (BNY), known as one of the most trusted custodians worldwide, expressed in their comment letter to the SEC how SAB 121 renders their crypto business non-viable. They posed a critical question:

“Why is the SEC decapitating BNY’s crypto custody business?”

Anchorage pointed out in their comment letter that SAB 121 appears to be blocking BNY’s custody offering from even getting off the ground. This rule is hindering the growth of reputable and regulated firms, curtailing their ability to provide vital services within the crypto market.

The outcry against SAB 121 extends beyond the industry itself. Senator Cynthia Lummis and Congressman Patrick McHenry have demanded answers, highlighting in a letter that this guidance would stifle banks and credit unions from offering Bitcoin and crypto custody services. Even within the SEC, Commissioner Hester Peirce publicly disagreed with the guidance.

The Political Landscape Raises Questions

The motive behind this perplexing rule becomes even more suspect when considering the broader political landscape. Matt Walsh claims that it serves the agenda of Senator Elizabeth Warren, who has long advocated for increased regulation and control over the digital asset industry. He states:

“As early as September 2021, Warren has been urging Gensler to fill the void left by Congress and shut down the digital asset industry.”

If Walsh’s claims are true, serious concerns arise about the influence and decision-making power of unelected officials like Gary Gensler, who holds sway over Bitcoin and crypto policy in the United States.

Urgent Congressional Action Needed

It is imperative for the US Congress to swiftly address this pressing issue and safeguard the growth and innovation of the industry. Repealing SAB 121 should be a top priority, removing the oppressive rule that hinders banks from offering custody services for digital assets.

Furthermore, enacting a digital asset market structure bill and a stablecoin bill would establish a clear and supportive regulatory framework. This framework would encourage responsible growth, while ensuring consumer protection, as asserted by Matt Walsh.

The implementation of SAB 121 by the SEC has raised concerns about its impact on cryptocurrency adoption in the United States. This accounting rule prevents major banks from holding cryptocurrencies, effectively impeding the growth of the industry. Urgent action from Congress is required to repeal SAB 121 and establish a supportive regulatory framework to foster responsible growth and innovation in the digital asset space.

Disclaimer: The information provided in this research report is for informational purposes only and should not be interpreted as financial or investment advice. The cryptocurrency market is highly volatile, and readers should conduct thorough research before making any investment decisions.