New York, Monday, July 15, 2024 – In a move that could significantly impact the cryptocurrency industry, the SEC has reportedly softened its stance on accounting rules for banks and brokerages.
This follows criticism of Staff Accounting Bulletin No. 121 (SAB 121), which previously mandated that these institutions report customer crypto holdings as liabilities on their balance sheets.
Under the new approach, the SEC is allowing certain banks and brokerages to utilize alternative business practices that exempt them from this specific reporting requirement.
However, these institutions will still be required to take steps to safeguard customer crypto assets in the event of bankruptcy and implement internal controls to mitigate legal risks associated with the crypto industry.
This change is expected to have a two-fold effect. It could lead to an expansion of custody options for crypto holders, potentially increasing accessibility and security. Secondly, it could entice more traditional financial institutions to enter the crypto space, legitimizing the industry and fostering further growth.
Previously, SAB 121 was introduced with the intention of promoting transparency and improved risk management within the rapidly evolving crypto landscape.
However, the regulation faced strong opposition due to concerns that it placed an undue burden on companies and potentially stifled innovation. Efforts by lawmakers to overturn the advisory were ultimately unsuccessful.
The Bloomberg Tax reported that several large banks, after consulting with the SEC staff starting in 2023, received approval to exclude these assets from balance sheet reporting by ensuring that customers’ assets would be protected in the event of a bankruptcy or failure.
This accounting stance could potentially broaden the range of companies available to American crypto holders for storing their portfolios.
Lenders argued that previous accounting treatment prevented them from offering crypto services due to the capital requirements triggered by larger balance sheets.
Financial industry trade groups have urged Congress to rescind the staff guidance, which acts as an agency rule.
However, the House failed to override a presidential veto on Thursday that would have revoked Staff Accounting Bulletin 121, leaving the measure in place.
The SEC staff issued the guidance in 2022, months before the collapse of crypto exchange FTX, stating that extraordinary reporting was necessary to keep investors informed about the technological and legal risks of the nascent technology.
Since then, companies like Coinbase Global Inc. and Robinhood Markets Inc. have been reporting the value of their customers’ crypto assets on their balance sheets.
Banks have successfully argued during consultations with SEC staff that wallets and spot Bitcoin exchange-traded products should be outside the scope of the crypto guidance.
