The House Financial Services Committee Advances Resolution to Enable US Banks to Custody Crypto
The House Financial Services Committee (HSFC) has taken a significant step towards facilitating institutional adoption of Bitcoin and cryptocurrencies. During a markup hearing on February 29, the committee showed bipartisan support for a resolution aimed at overturning a Securities and Exchange Commission (SEC) guideline known as Staff Accounting Bulletin 121 (SAB 121). This guideline has been a barrier for banks interested in providing crypto custody services. The resolution received 31 votes in favor and 20 against.
Resolution Aims to Revoke an “Unlawful Rule” and Enhance Consumer Protection
The resolution, sponsored by US Republicans Wiley Nickel and Mike Flood, seeks to utilize the Congressional Review Act to revoke what they consider an “unlawful rule.” The HSFC expressed its position, stating that SAB 121 leaves consumers unprotected by discouraging regulated banks from becoming digital asset custodians. According to US Republican Mike Flood, the SEC’s current stance has effectively excluded the most regulated institutions from serving as custodians for digital assets. He believes it is time to roll back SAB 121 and put a stop to what he perceives as Gary Gensler’s overreach.
Echoing the committee’s sentiments, the Chamber of Digital Commerce announced that the bipartisan effort led by Wiley Nickel, Mike Flood, and Senator Lummis to nullify SAB 121 has successfully passed markup and is now headed to the House floor. This development is seen as a crucial moment for digital asset regulation as it aims to rectify the perceived overreach of SAB 121, which has been criticized for its negative impact on consumer protection and the digital asset custody market.
Perianne Boring, founder of the Chamber of Digital Commerce, highlighted the significance of this legislative progress, stating that SAB 121 passed out of the committee with bipartisan support and is now heading to the House floor.
Jake Chervinsky, Chief Legal Officer at Variant, criticized SAB 121 for being an “unlawful rule adopted in violation of the Administrative Procedures Act and the Congressional Review Act” that unfairly penalizes crypto without any valid justification. However, he also warned that achieving a repeal through Congress is highly unlikely, suggesting that legal action may be necessary to challenge the rule.
Repealing SAB 121’s Impact on Spot Bitcoin ETFs
The effort to repeal SAB 121 is motivated by concerns about concentration risk in the custody of bitcoin for exchange-traded funds (ETFs). In an op-ed published in Newsweek, Wiley Nickel and Mike Flood emphasized the importance of involving banks in the custody of digital assets. They acknowledged the approval of 11 spot bitcoin ETFs as a step forward but pointed out that it is not the end of the regulatory journey.
The op-ed highlighted that these approved ETFs rely on just four custodians, with a significant concentration in a single entity (Coinbase). Nickel and Flood emphasized the absence of banks as custodians for these ETFs and argued that banks’ expertise and regulated framework make them ideal for such a role, especially considering bitcoin’s nature as a bearer instrument.
They expressed concern about SAB 121’s requirement for digital assets to be included on banks’ balance sheets, which diverges from the treatment of traditional securities. This imposes unnecessary capital and liquidity burdens on banks, preventing them from serving as custodians. They criticized SEC Chair Gary Gensler for not showing interest in rescinding SAB 121 to protect investors.
As of now, BTC is trading at $61,286.
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