- The new regulations will transform banks’ relationship with digital assets
- Challenges for the new banking infrastructure, in the United States and worldwide
- The growing demand for custody, trading, and portfolio management services opens new business opportunities for banks and their tech providers.
The era of SAB 122 has begun. The repeal of Staff Accounting Bulletin 121 (SAB 121) in the United States on January 23 has generated expectations—and intense debate—among fintech professionals, banks, and technology providers.
The repealed regulation, implemented in 2022 by the Securities and Exchange Commission (SEC), required financial institutions that held digital assets (such as cryptocurrencies) to record these assets on their balance sheets, which had a significant impact on their capital and liquidity requirements.
For a long time, banks argued that this rule forced them to bear disproportionate accounting and regulatory burdens, which discouraged their participation in the crypto-asset market.
Consulting firm Ropes & Gray LLP highlighted in a report that the repeal of SAB 121 responded to criticisms from various stakeholders, including members of both political parties in the U.S. Congress and SEC commissioners. This marks a turning point for the industry but also raises questions about how the custody of digital assets will work and how they will fully integrate with traditional banking. The process is already underway.
Local and global impact
SAB 121 was designed to address the risks associated with the custody of digital assets, a market that has grown exponentially in recent years.
However, its implementation generated controversy. For many financial institutions, this meant a missed opportunity, as the rise of cryptocurrencies and other digital assets has created a growing demand for custody, trading, and portfolio management services.
Yet, SAB 121 acted as a barrier, leaving much of this market in the hands of fintech companies and specialized providers, entirely excluding traditional banks.
Consulting firm KPMG noted that with the new SAB 122 rule, banks must assess whether there is an obligation related to the risk of loss, and if so, measure it in accordance with existing accounting standards. The debate about Bitcoin custody has also been reignited, as this is an opportunity for banks to custody this asset on behalf of their customers.
Opening up to a vast market
With SAB 122, U.S. banks now have a unique opportunity to reclaim ground in the digital asset market. However, banks will need to invest in technology and talent to manage the risks associated with digital assets, from cybersecurity to regulatory compliance.
This change not only makes it easier for banks to custody cryptocurrencies but also directly impacts the enablement to integrate tokenized digital assets. For example, Real World Assets (RWA), which is quite broad.
With the guidance of SAB 122, the integration of traditional finance with blockchain technology is now much simpler.
From the perspective of users and investors, this executive order presents pillars designed to foster consumer protection:
- Clear definitions
It requires the classification of cryptocurrencies based on their functions: as securities, commodities, or payment tokens. - Tax simplification
To reduce the complexities of compliance, it establishes a standardized approach to crypto tax reporting and defers capital gains for certain blockchain-based projects. - Global collaboration
Recognizing the global nature of cryptocurrencies, it includes provisions for partnerships with international regulators to harmonize standards.
Regulatory challenges and considerations
Although it is positive news for many in the industry, it is not without challenges. First, the regulation of digital assets remains a complex and fragmented issue. Banks and fintechs will need to navigate an evolving regulatory landscape, which could create uncertainty in the short term.
Additionally, the custody of digital assets carries unique risks, such as market volatility and cybersecurity threats. Banks will need to implement robust measures to mitigate these risks and ensure the protection of their clients’ assets.
The new rule represents an opportunity for banks to innovate and capture a share of the growing digital asset market. For fintechs and technology providers, it is a call to action to develop solutions that enable financial institutions to take advantage of this new reality.
However, success will depend on the sector’s ability to collaborate, innovate, and adapt to a constantly changing regulatory and technological environment.