SEC’s Secret Bank Exemptions for Crypto Custody: Favoritism or Risk Management?

• The SEC reportedly exempted certain banks from the controversial SAB 121 crypto custody disclosure requirements.
• SAB 121 has been criticized for disrupting banks’ balance sheets.
• President Biden’s veto stood despite bipartisan congressional efforts to overturn SAB 121.

The U.S. Securities and Exchange Commission (SEC) has reportedly exempted certain banks from mandatory disclosure requirements under Staff Accounting Bulletin No. 121 (SAB 121), a controversial crypto banking regulation.

SAB 121 requires publicly traded banks, such as JP Morgan Chase, Bank of New York Mellon, and Citi, to disclose their crypto custody services. Critics, including crypto enthusiast Gyges, argue that this requirement negatively impacts banks’ balance sheets and risk management, effectively hindering their ability to offer crypto custody services. This, they claim, leaves crypto users worse off and represents poor policy-making.

According to a Bloomberg article, an unnamed SEC source revealed that an exemption was granted to banks that have demonstrated safe custodial practices. Gyges took to X (formerly Twitter) to express his disapproval of the SEC’s reported action.

He argued that the move exemplifies the SEC’s “worst practices” under Chair Gary Gensler’s leadership, suggesting that the decision favors certain institutions based on connections rather than merit.

Furthermore, Gyges posited that the SEC may not have fully understood the implications of SAB 121 on banks when the regulation was introduced. He noted that SEC accountants are not typically experts in bank capital regulation and that Gensler admitted in April 2023 that the SEC did not consult with bank regulators before issuing the regulation.
Both Houses of Congress voted to overturn the crypto banking regulation on a bipartisan basis. However, President Biden vetoed the congressional resolution, drawing widespread criticism. The House recently held a vote to override the veto, but fell short of the required two-thirds majority with a 228-184 tally.