SEC's SAB 121 Deters Banks From Crypto Custody Market
An SEC staff accounting bulletin requires banks to hold customer crypto on-balance-sheet, a capital-intensive treatment that is preventing them from serving as custodians for new spot crypto ETPs.
The SEC's Staff Accounting Bulletin 121 (SAB 121), issued in March 2022, requires institutions to record crypto-assets they hold for customers as both an asset and a liability on their own balance sheets. This on-balance-sheet treatment is a significant departure from the handling of traditional custodied assets, such as securities, which are kept off-balance-sheet. For regulated banks, the accounting directive inflates their balance sheets, which in turn triggers higher capital reserve requirements under banking rules.
This makes crypto custody prohibitively expensive for banks and is a primary reason why non-bank crypto firms, rather than major US banks, are serving as custodians for the recently approved spot Bitcoin and Ether ETPs. The guidance has drawn criticism from banking industry groups, and the Government Accountability Office has determined it is a "rule" for the purposes of the Congressional Review Act. This finding opens a path for Congress to potentially overturn the guidance. Counsel should monitor legislative efforts to rescind or modify SAB 121, which could significantly alter the competitive landscape for digital asset custody.