Technology

Unlocking the Future: Banking Giants Rally for SEC to Revamp SAB 121 in Digital Asset Custody

The Bank Policy Institute and Other Financial Associations Request Modifications to Digital Asset Custody Regulations

On February 14, 2024, the Bank Policy Institute (BPI), American Bankers Association (ABA), Financial Services Forum (the Forum), and the Securities Industry and Financial Markets Association (SIFMA) collectively addressed a letter to Gary Gensler, Chair of the U.S. Securities and Exchange Commission (SEC). They requested the SEC to consider targeted modifications to Staff Accounting Bulletin No. 121 (SAB 121), issued on March 31, 2022, to alleviate challenges it poses to U.S. banking organizations in digital asset custody. As the two-year mark approaches since SAB 121’s issuance, these associations aim to align its provisions with recent policy developments and the practical experience of regulated banking organizations, without undermining its original policy objectives of enhancing investor information.

The banking and financial associations articulate their concerns and provide recommendations for refining SAB 121 to foster responsible innovation while ensuring investor protection and market integrity. They argue that the on-balance sheet requirement for safeguarding crypto-assets has precluded banking organizations from effectively providing digital asset custody at scale. This restriction, coupled with a broad definition of “crypto-asset,” has deterred the development of DLT applications beyond cryptocurrencies.

The letter cites the recent SEC approval of Spot Bitcoin ETPs and the proposed rule on Safeguarding Advisory Client Assets covering digital asset custody as developments warranting a reevaluation of SAB 121. They emphasize that current regulations have driven digital asset custody services to non-banking organizations, potentially compromising the financial system’s safety and stability due to a lack of regulatory oversight akin to that of banking institutions.

To mitigate these challenges, the associations recommend narrowing the definition of “crypto-assets” to exclude traditional financial assets recorded or transferred using DLT and exempting banking organizations from on-balance sheet treatment while maintaining disclosure requirements. They believe these adjustments will enable banking organizations to contribute to the digital asset ecosystem without unnecessary regulatory burdens.

The banking and financial associations request a meeting with the SEC to discuss their proposed modifications to SAB 121, emphasizing their commitment to collaborating with the Commission. They underscore the importance of reflecting on SAB 121’s objectives in light of technological advancements and policy developments since its issuance.

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