crypto – Duane Morris Banking and Finance Law

January 31, 2025January 31, 2025 by Roger S. Chari

With SAB 121 Rescinded, Can Banks Now Hold Crypto?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.

July 9, 2024 by Roger S. Chari

Has Your State Passed the Crypto UCC Amendments?

There’s less than a year to go until the proposed implementation of the Uniform Commercial Code amendments relating to cryptocurrencies and other digital assets. The drafters of the amendments contemplated a gradual phase-in of the rules over a period of at least a year, but no earlier than July 1, 2025, to give secured parties time to assess their secured status and take any necessary actions. Many states that have approved the amendments opted for a July 1, 2025 start date, but some of them selected a later date. In addition, slightly more than half of the states have not yet approved the amendments. It’s likely that these states will also choose a later start date.

For a secured lender operating in multiple states, keeping track of the implementation dates can be confusing. Losing track of them can potentially lead to significant consequences, including loss of priority in crypto assets. For an overview of the adoption of the UCC amendments by the various states so far, take a look at our recent Alert.

June 10, 2024 by Roger S. Chari

Congressional Disapproval of SAB 121 Vetoed

On May 31, 2024, the President vetoed H.J.Res 109, which evidenced the disapproval by Congress of Staff Accounting Bulletin 121 of the Securities and Exchange Commission. This followed several years of industry and bipartisan efforts in Congress to blunt the effect of or nullify the rule.

On its face, SAB 121 is fairly innocuous. Crypto assets held in custody by an SEC reporting company for its clients must be reported both as an asset and as a liability on its balance sheet. From an accounting perspective, this is balance sheet neutral since the asset and liability cancel each other out.

For regulated banks that want to expand their traditional client custody business from securities and other financial assets to crypto, this is a departure from the standard accounting treatment that can be prohibitively expensive. Assets held in custody are usually balance sheet neutral to a bank since they belong to the bank’s customers and are not included on the bank’s balance sheet. Adding the asset and subtracting it as a liability is mathematically neutral. However, treating crypto in custody as a liability of the bank triggers the minimum capital requirements that banks are required by regulators to maintain to manage investment risk and prevent a collapse if there is a run on the bank.

Why did the SEC change the rule for crypto assets in custody? Did they have the authority to do so? Why does it apply to banks? We discuss these and other questions in our recent Alert.