SEC Permits Banks to Exclude Crypto Holdings, Easing Financial Burden

• SEC’s new guidance lets banks exclude customer crypto holdings from balance sheets, easing financial strain.
• Lobbying efforts against SAB 121 highlight the financial industry’s push for favorable crypto regulations.
• The SEC’s revised stance opens more options for American crypto holders with improved bank safeguards.

The U.S. Securities and Exchange Commission (SEC) has issued new guidance permitting banks and brokerages to exclude customer cryptocurrency holdings from their balance sheets. 

This policy shift mandates the implementation of risk mitigation measures and represents a significant departure from the SEC’s earlier stance that emphasized transparency and investor protection.

In 2022, the SEC introduced Staff Accounting Bulletin 121 (SAB 121). This bulletin required companies to report customer crypto holdings on their balance sheets to inform investors of potential technological and legal risks, especially after the collapse of the major crypto exchange FTX. 

Banks and financial industry groups lobbied Congress to revoke SAB 121, arguing it inflated balance sheets and triggered capital requirements, increasing the cost and difficulty of offering crypto services. Despite their efforts, the House recently failed to override a presidential veto on a measure to rescind SAB 121.

On July 11, 2024, the U.S. House of Representatives voted on Joint Resolution 109, which aimed to invalidate SAB 121. President Joe Biden vetoed the resolution, supporting the SEC’s accounting policy. 

The House vote, with 228 in favor of overturning the veto and 184 against, fell short of the two-thirds majority needed. This outcome underscores the divisive nature of SAB 121 and the broader debate over crypto regulation in Congress.

Several large banks have negotiated with the SEC to bypass balance sheet reporting by ensuring customer asset protection in cases of bankruptcy or failure. Additionally, they have implemented robust internal safeguards. These measures enable institutions to offer crypto services without inflating their balance sheets and facing stricter capital requirements.

The SEC’s new stance could significantly expand the range of companies offering crypto services, providing more options for American crypto holders. With the approval of spot Bitcoin products, financial institutions are increasingly interested in entering the crypto market. This development promises a broader array of crypto service options for American investors while ensuring safety and compliance with regulatory standards.