SEC Insider Reveals Reason Why Agency Eased SAB 121 For Select Entities

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As a researcher with a background in finance and securities law, I find the SEC’s recent decision to grant exceptions to certain banks and broker-dealers from the SAB 121 rules for custodying crypto assets intriguing. The rationale behind these exceptions is that these entities have demonstrated unique operational models that ensure customer asset ownership even in the case of bankruptcy or resolution.

More recently, certain banks and broker-dealers have been granted exemptions by the U.S. Securities and Exchange Commission (SEC) to hold crypto assets, going against the established guidelines set forth in Staff Accounting Bulletin (SAB) 121. Consequently, there has been much debate among online communities regarding the SEC’s actions, and this controversy can now be explained as a ‘gray area’ or ‘flexibility’ in the application of SAB 121 guidelines.

Why SEC Eased SAB 121 Rule For Certain Entities?

An SEC representative confirmed that the Securities and Exchange Board (SAB) Rule 121, which sets out the accounting and disclosure requirements for businesses handling crypto assets on behalf of clients, has not been amended.

In situations of financial hardship, such as bankruptcy or resolution, this proves useful. Notably, FOX journalist Eleanor Terrett’s investigation uncovered that certain broker-dealers and custodian banks have shown the Securities and Exchange Commission (SEC) staff that their business models vary substantially from those described in SAB 121.

According to the spokesperson quoted by Terrett:

Some broker dealers and custodian banks have presented convincing cases to the Securities and Exchange Commission (SEC) staff, distinguishing their specific situations from those outlined in SAB 121. For instance, they guarantee that customers retain ownership of their assets under any circumstance, be it during a resolution or bankruptcy event.

These entities have successfully convinced the SEC that they will keep customers in control of their assets during unfavorable circumstances. Consequently, they were granted exemptions from the rigorous regulations set forth by SAB 121.

As a researcher, I’ve come across Terrett’s revelation that the Securities and Exchange Commission (SEC) accounting staff, in charge of SAB 121, held confidential talks with certain financial institutions. Surprisingly, it seems these discussions weren’t shared with the SEC Commissioners. Now, the commissioners are making efforts to grasp the essence of these previously undisclosed conversations.

Industry Backlash On These Exceptions

As the U.S. House kept President Joe Biden’s veto on the anti-SAB 121 bill in place, the Securities and Exchange Commission (SEC) announced a groundbreaking regulation. This new rule enables banks and brokerages to exclude their clients’ cryptocurrency assets from their financial statements. Nevertheless, they remain responsible for managing all associated risks diligently.

The SEC’s decision to offer guidance on crypto holdings for banks is a constructive move following the intense argument in Congress regarding the disputed crypto-accounting regulations. A reliable insider at the Securities and Exchange Commission disclosed that the agency’s team has initiated the process of clarifying particular arrangements under which financial institutions can exclude their cryptocurrency assets from reporting them as liabilities on their financial statements.

Over the past year, major banks have held talks with the Securities and Exchange Commission (SEC) regarding crypto assets. Consequently, they’ve been given the go-ahead to exclude these assets from their financial statements, under the condition that they maintain adequate customer asset protection should the bank face insolvency. However, the SEC stipulates that banks must put in place extra protective measures and rigorous internal controls for managing these crypto holdings.

This action sparked strong criticism from the cryptocurrency sector due to perceived bias. VanEck’s Digital Assets Research Head, Matthew Sigel, commended the recent decision but also highlighted its shortcomings. In a post on X, he stated, “Positive news (although it remains an arduous process that disproportionately benefits larger entities over rescinding SAB121 which would have established a fair playing field).”

Additionally, Caitlin Long, the CEO of Custodia Bank, joined the conversation, voicing her displeasure over the alleged bias in granting Fed masteraccounts. She tweeted, “The SEC leadership is retaliating against the crypto industry (following Ro Khanna’s White House meeting) by granting special waivers to large banks under SAB121, while leaving crypto firms stuck with it. How can progressives tolerate such preferential treatment for corporations?”

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2024-07-13 10:12