On February 14, 2024, a significant development unfolded in the financial regulatory landscape as four leading financial associations—the Bank Policy Institute (BPI), the American Bankers Association (ABA), the Financial Services Forum (the Forum), and the Securities Industry and Financial Markets Association (SIFMA)—jointly addressed a letter to Gary Gensler, Chair of the U.S. Securities and Exchange Commission (SEC).

This letter represents a unified request from these influential bodies for the SEC to consider targeted modifications to Staff Accounting Bulletin No. 121 (SAB 121), a directive that has significantly impacted U.S. banking organizations’ ability to engage with digital assets since its issuance on March 31, 2022.

The Core of Their Request

The associations’ letter underscores the challenges that SAB 121 has introduced for regulated banking organizations, particularly in providing custodial solutions for digital assets at scale. They argue that the on-balance sheet requirement of SAB 121, coupled with a broad definition of “crypto-asset,” has deterred banking organizations from developing responsible use cases for distributed ledger technology (DLT). This, in turn, has kept activity outside the prudential perimeter, depriving the market of the legal and supervisory protections provided by federally-regulated banking organizations.

Specific Concerns Highlighted

  1. Spot Bitcoin ETPs: The approval of 11 Spot Bitcoin Exchange-Traded Products (ETPs) by the SEC has opened investor access to this asset class through a regulated product. However, banking organizations are notably absent from serving as asset custodians for these ETPs due to the capital ratio and other requirements resulting from SAB 121. This scenario raises concerns about the safety and stability of the ecosystem and suggests a concentration risk that could be mitigated if banking organizations were allowed to provide custodial services.
  2. Use of DLT for Traditional Financial Assets: The associations point out the potential benefits of using DLT to record traditional financial assets, such as bonds, which could streamline payment, clearing, reconciliation, and settlement services. However, SAB 121’s broad definition of “crypto-asset” poses a barrier to meaningful engagement in DLT-based projects by banking organizations.

Proposed Modifications and Clarifications

The letter outlines several targeted modifications to SAB 121 that the associations believe could address their concerns without undermining the SEC’s policy objectives:

  • Narrowing the Definition of “Crypto-Assets”: They suggest refining the definition to exclude traditional financial assets recorded or transferred using blockchain networks, as these do not present the same risks as cryptocurrencies.
  • Exempting Banking Organizations from On-Balance Sheet Treatment: The associations propose maintaining disclosure requirements while exempting banking organizations from the on-balance sheet treatment of crypto-assets. This approach would allow banking organizations to make necessary disclosures about their digital activity without the burdensome capital implications of SAB 121.

Looking Forward

The associations express their willingness to work collaboratively with the SEC to refine SAB 121, emphasizing their shared goals of investor protection, market integrity, and financial stability. They request a meeting with Chair Gensler and SEC staff to discuss their proposed modifications in detail.

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