SEC maintains firm stance on crypto custody rule for banks

The United States Securities and Exchange Commission (SEC) has reinforced its position on a controversial rule that restricts regulated financial firms from offering crypto custody services. 

During a speech at a banking conference on September 9, SEC chief accountant Paul Munter addressed the agency's regulatory approach to accounting for crypto assets, particularly focusing on SEC Staff Accounting Bulletin No. 121 (SAB 121). 

“The [SEC] staff’s views in SAB 121 remain unchanged,” Munter stated. 

He added that, “Absent particular mitigating facts and circumstances, the staff believes an entity should record a liability on its balance sheet to reflect its obligation to safeguard crypto-assets held for others.” 

SAB 121, introduced in March 2022, has sparked debate in political and financial circles due to its impact on banks and regulated financial institutions looking to provide crypto custody services. 

The rule essentially prevents these institutions from holding crypto assets on behalf of clients by requiring them to record a liability on their balance sheets for the digital assets they safeguard. 

Nate Geraci, President of the ETF Store, commented on the SEC's stance in a September 10 post on X, stating that the SEC “appears dug in” on SAB 121. 

“They simply don’t want to provide regulated financial institutions with the ability to custody crypto,” Geraci added. 

Munter acknowledged that not all accounting arrangements involving crypto assets fit within the guidelines set out in SAB 121. 

He noted that bank holding companies offering crypto custody with bankruptcy protection may not need to record a liability on their balance sheets. 

Additionally, “broker-dealers” that facilitate crypto transactions without controlling the cryptographic keys might also be exempt from this requirement. 

SEC Commissioner Hester Peirce, a vocal critic of the rule, reiterated her concerns on X, expressing her continued dissatisfaction with both the content and the process of SAB 121. 

"I continue to be concerned about the SAB 121 substance and process," she stated. 

In May, the U.S. House of Representatives voted to overturn the controversial SEC guidance. 

However, the effort was blocked by President Biden, who vetoed the repeal in June, leaving the rule intact and the SEC's stance on crypto custody unchanged.