SEC Removes Roadblock for Banks to Hold Crypto. Why It Won't Lead to Major Change. — Barrons.com

By Joe LightThe Securities and Exchange Commission is removing a roadblock that kept banks from offering custody for Bitcoin and other cryptocurrencies. But it will take a lot more for traditional finance firms to dive into digital assets.Late Thursday, the SEC rescinded guidance that crypto executives had derided for keeping financial institutions out of the digital assets industry. The bulletin, dubbed Staff Accounting Bulletin 121, or SAB 121 for short, was issued in 2022. The notice was from SEC staff and wasn't legally binding, but companies tend to take such guidance as writ rather than suggestion.Among other things, SAB 121 said banks should report custodied crypto assets as liabilities on their balance sheets. They'd make public how much crypto they held and disclose what vulnerabilities holding the crypto created. That way, for example, investors in the banks would know how exposed the company was to losing the keys to a crypto wallet.However, the bulletin had follow-on effects that crimped banks' abilities to offer custody services at all. Reporting more liabilities on their balance sheets, for example, could increase capital requirements."On-balance sheet treatment will preclude highly regulated banking organizations from providing a custodial solution for digital assets at scale," wrote the American Bankers Association, Bank Policy Institute and other trade groups in a letter to the SEC last year that called for changes.Anger at the guidance ramped up last year, culminating in Congress passing legislation that would have rescinded the bulletin. President Biden vetoed the bill.Getting rid of the bulletin will likely make it easier for banks to custody crypto, but there's reason to believe it will take more regulatory changes for traditional financial institutions to jump into digital assets.The main impediments to banks embarking on most crypto activity have been their regulators: the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Federal Reserve. Those three agencies — whose leaders are appointed by the president but are supposed to operate mostly autonomously — have tried to dissuade traditional financial institutions from getting too involved in crypto. A joint statement by those regulators in 2023, for example, highlighted risks to banks surrounding fraud, legal uncertainties about custody, contagion, and a "lack of maturity and robustness" in the crypto sector's risk management and governance practices.Those kinds of pronouncements will likely weigh heavily in the minds of banking executives, despite SAB 121 disappearing.To that end, President Trump on Thursday also signed an executive order that, among other things, called for the administration to promote "fair and open access to banking services" to crypto firms. The order formed a working group on crypto policies that included the heads of the Treasury Department, SEC, and others. It notably didn't include the banking regulators.The working group and repealing SAB 121 are "the easy moves," wrote TD Cowen analyst Jaret Seiberg in a research note on Friday, adding that "establishing the rules the industry needs will take years, not weeks."The White House clearly wants to change the rules in crypto's favor. Banks, however, might be the last to come along.Write to Joe Light at [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.