SAB 121 revoke begins Operation Unchoke

A day ago, we suggested the SEC faced one of its most straightforward decisions following a proposed rule change enabling share creation units to be structured in-kind instead of in cash.

In fact, perhaps revocation of Staff Accounting Bulletin 121 (SAB 121) was easier, given it was more of an internal administrative reversal, with no reference to any specific firm, despite its wide-ranging restrictive effect, while in force.

Published in April 2022, SAB 121 in essence provided “interpretive guidance" indicating that entities 'safeguarding' crypto assets "held for their platform users", should report the crypto both as an asset and a liability on their balance sheet at fair value.

It became an infamous cause célèbre (in crypto) in an unusual unification of TradFi and crypto platforms and institutions, by, in effect, posing onerous obligations on any firm that would in the course of its business serve as a third-party custodian.

With banks subject to minimum capital requirements, the potential addition of customer crypto assets to their balance sheets was a red line. Hence SAB 121 effectively had a chilling effect for U.S. bank crypto participation across myriad potential lines.

SAB 121 was widely assumed to be but one aspect of an unstated cross-agency policy referred to as Operation Chokepoint 2.0. A modern form of unofficial sanction against unfavored industries, similar to the Obama era Operation Chokepoint 1.0.

The cancellation of SAB 121 also has an eye to possible 'consequences', given the partial nature of the previous guidance vs. broader custody rules, which don't typically require customer assets to be reported on banks' balance sheets. (Including under Basel III rules on capital requirements.)

As many legal observers point out though, SAB 121's rescission is only a first step:

Rescission of SAB 121 does not completely absolve a reporting company from recognizing a liability relating to crypto custody activities. As described in SAB 122, applicable accounting principles and standards may continue to affect whether a reporting company should report a contingent liability on its balance sheet and the method for measuring the amount of such liability.

From 'SAB 121 Undone - Will Bank Regulations on Crypto Follow?' - Duane Morris Alerts and Update

Duane Morris advises turning attention to federal regulators that directly supervise banks, including the Federal Reserve Board (FRSB), Office of Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

All continue to have guidance in place that, at best, maintains unclarity; affecting not only "banks that want to engage in cryptocurrency activities, but digital asset companies that want banking services as well."

The firm, in common with much opinion, interprets rescission of the SEC's SAB 121 as removing one pillar for supervisory regulators to lean on, placing the ball in the bank regulators' court.

The temperature continues to rise for such agencies, chiefly under pressure of a key law suit, which has triggered embarrassing releases of previously internal paperwork.

With the political and regulatory backdrop also now moving against such agencies, that temperature and pressure are rising even further.