The U.S. Securities and Exchange Commission (SEC) recently made a landmark decision to repeal SAB 121, a controversial piece of guidance introduced in March of 2022 under the leadership of former SEC Chair Gary Gensler. This repeal marks yet another significant step forward for the crypto industry, unlocking new opportunities for U.S. banks to provide custody services for digital assets like Bitcoin and Ethereum.

Overview of SAB-122, via SEC website

Here’s why this development matters and what it could mean for the future of crypto adoption.

A Brief History of SAB 121

SAB 121 was introduced to address how publicly traded companies should account for the ‘‘risks’’ associated with holding cryptocurrencies for customers. Specifically, it required firms to recognize crypto assets held in custody as liabilities on their balance sheets, while also disclosing the associated ‘‘risks’’.

At the time, this created an immense regulatory burden for banks and financial institutions, effectively dissuading them from ever entering the crypto custody market. Many saw this as a move to stifle innovation, with critics arguing that the guidance was overly restrictive and hindered the growth of the digital asset ecosystem in the U.S.

Comments from Senator Cynthia Lummis after the repeal was officially announced.

The timing of the repeal, just days after Gary Gensler's departure from the SEC, signals a swift shift in regulatory attitudes toward fostering innovation rather than stifling it.

Why the Repeal Is a Win for Digital Assets

1. Enabling Institutional Custody
   The repeal of SAB 121 removes the accounting obstacles that prevented banks from offering custody services for cryptocurrencies. With clearer regulatory pathways, banks can now enter the market, providing secure and regulated custody solutions for digital assets. This is a monumental step in bridging the gap between traditional finance and the crypto industry.
2. Unlocking New Capital
   U.S. banks entering the crypto custody market now opens the door for institutional capital to flow into digital assets. Historically, lack of trusted custodians has been a key barrier preventing institutional investors from fully embracing cryptocurrencies. The repeal of SAB 121 creates an opportunity for significant new capital inflows, strengthening market infrastructure and liquidity.
3. Increasing Credibility
   The involvement of regulated banks enhances the credibility of cryptocurrencies, fostering greater confidence among both retail and institutional investors. Banks have the resources and expertise to offer secure custody services, which could mitigate the perceived risks of investing in crypto.
4. Global Competitiveness
   With countries like Switzerland and Singapore already leading in crypto-friendly banking regulations, the U.S. was at risk of falling behind in the race to attract institutional crypto investment. Allowing banks to custody digital assets puts the U.S. back in the game, ensuring its financial sector remains competitive on a global scale.

Image via CoinTelegraph, displaying the difference between SAB 121 and SAB 122. (Note - SAB 122 is the current framework that is now in effect)

What’s Next for Crypto?

The repeal of SAB 121 is more than just a regulatory shift; it’s a signal that U.S. regulators may be willing to take a more balanced approach to the crypto industry. As banks begin to explore digital asset custody, we could see:

• Broader Institutional Adoption: With secure custody solutions, more institutions may include cryptocurrencies in their portfolios.
• Product Innovation: Banks might develop new crypto-related services, such as lending, staking, or trading platforms, further integrating digital assets into the traditional financial ecosystem.
• Increased Market Stability: Institutional participation often brings greater liquidity and reduced volatility, contributing to a more mature market.

The repeal of SAB 121 is a reminder of how regulatory clarity can serve as a catalyst for innovation and growth. By enabling U.S. banks to custody cryptocurrencies, this decision paves the way for a new wave of capital, credibility, and adoption in the crypto space. It’s a win for investors, institutions, and the industry at large—setting the stage for a brighter future for digital assets.

Bright days ahead for the crypto industry with the SEC under new leadership

Follow us on LinkedIn to receive push notifications on our latest posts.