With SAB 121 Rescinded, Can Banks Now Hold Crypto?

For almost three years, Staff Accounting Bulletin 121 of the Securities and Exchange Commission effectively prevented banks from holding crypto on behalf of customers by indirectly requiring them to maintain a capital loss reserve equal to the full value of the crypto even though the bank does not own the crypto. The announcement by SEC Acting Chairman Mark T. Uyeda on January 21, 2025 of a new crypto task force to be led by pro-crypto Commissioner Hester Peirce foreshadowed a change in the Commission’s attitude towards crypto. Two days later, the SEC issued Staff Accounting Bulletin 122 rescinding SAB 121 effective as of January 30, 2025. If the dry and formal language of SAB 122 left any doubt as to the attitude shift, Commissioner Peirce’s post on X later that day, “Bye, bye SAB 121! It’s not been fun” spoke volumes.

With this substantial financial impediment on banks lifted, it would be easy to assume that banks are now free to offer crypto custody and other digital asset services to customers. However, although the SEC took the lead over the last several years, there are other regulators that have a more direct impact on the banking system- the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. In large part, these institutions have also discouraged banks from engaging in crypto activities, but they have been able to do so more quietly given the SEC’s more aggressive stance. On January 29, 2025, Federal Reserve Chair Jerome Powell offered some hope, stating at the Federal Open Markets Committee meeting that “we’re not against innovation,” and that banks are “perfectly able to serve crypto customers.”

In our recent Alert, we discuss some of the implications of the rescission of SAB 121 and the bank regulatory challenges to come.

Coinbase Enters Crypto Lending Market for Second Time with Morpho Labs Collaboration

By Rubina Karapetyan, Joseph Silvia and Mauro Wolfe

Earlier this month, Coinbase, the largest cryptocurrency platform in the U.S., partnered with Morpho Labs, the biggest onchain lending platform on Coinbase’s Base network, to introduce a bitcoin-backed loan service. This new service, which operates on Base, Coinbase’s Ethereum layer-2 network, lets users borrow up to $100,000 in USD Coin (USDC) by using their Bitcoin as collateral and is available to all U.S. residents, except those in New York.

Borrowing USDC against Bitcoin has been possible on platforms like Morpho and other DeFi services for some time. However, with this new collaboration, Coinbase has integrated Morpho’s lending services directly into its own interface, which it believes will attract borrowers with easier access and a more user-friendly experience. The service aims to close the gap between holding crypto assets for the future and putting them to use today. Although it currently will only support Bitcoin, Coinbase plans to eventually extend the service to other crypto tokens.

Coinbase merely facilitates the exchange; it does not directly issue loans. Borrowers can always choose when they want to pay off their loans because there are no set repayment schedules. Interest rates are adjusted by Morpho based on real-time market conditions. Unlike traditional loans that depend on credit scores, crypto loans instead require substantial collateral. Morpho’s platform ensures a minimum collateral ratio of 133%. If the loan balance, including accrued interest, reaches 86% of the collateral’s value, liquidation is automatically triggered, as well as repayment and penalty fees. Borrowers are allowed to adjust their loan-to-value ratio whenever they want as long as the ratio stays above the required threshold. Through the Coinbase app, Coinbase will share liquidation trigger warnings if the loan balance reaches the threshold, giving borrowers a chance to cure.

According to the Coinbase website, to access the service, borrowers can go to the Cash tab within their Coinbase app, click on “Borrow,” and enter the amount of USDC they want to borrow against their Bitcoin. After confirming the amount, the bitcoin that is pledged as collateral is converted to Coinbase Wrapped BTC (cbBTC) token, a bitcoin-backed token issued by Coinbase, and then transferred onchain to a Morpho smart contract. Morpho will then disburse the USDC loan, which borrowers will be able to see instantly in their Coinbase account.

This launch marks Coinbase’s second entry into the Bitcoin lending market. In November of 2023, the platform officially ended its “Borrow” program, which allowed borrowers to get cash loans backed by their bitcoin.

The new service has advantages as well as risks. Selling bitcoin can result in capital tax gains or losses. For this reason, as well as others, many crypto traders are hesitant to sell their holdings. Now, they can instead borrow against their Bitcoin and use their digital assets, likely avoiding a sale and tax consequences. However, the tax implications remain unclear, mainly because the conversion from bitcoin to cbBTC might be deemed a taxable event in the future. In addition, the volatility of bitcoin prices could affect the value of the pledged collateral, possibly leading to liquidation if the required thresholds are not satisfied. Finally, while using a DeFi platform like Morpho may offer greater transparency, smart contracts historically carry risks, such as bugs and hacks. We will continue to watch these and related developments as the industry continues to mature and work through challenges.

© 2009-2025 Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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