The House Financial Services Committee (HSFC) pushed forward a resolution that will change the landscape for institutional adoption of Bitcoin and crypto. On February 29, a markup hearing saw bipartisan support for a resolution geared toward overturning a Securities and Exchange Commission (SEC) guideline—Staff Accounting Bulletin 121 (SAB 121)—which has been a barrier for banks involved in crypto custody services. The vote resulted in 31 members in favor and 20 against.

When Will US Banks Be Able To Custody Crypto?

The resolution, propelled by US Republicans Wiley Nickel and Mike Flood, seeks to leverage the Congressional Review Act to revoke what they deem an “illegal rule.” The HSFC articulated their stance, stating, “The SEC’s Staff Accounting Bulletin 121 leaves consumers unprotected by deterring regulated banks from being digital asset custodians. US Republican Wiley Nickel and US Republican Mike Flood’s bipartisan resolution reverses this illegal rule using the Congressional Review Act.”

US Republican Mike Flood voiced a critical perspective on the SEC’s current stance, asserting, “SEC has virtually locked out probably probably the most regulated institutions from serving as custodians for digital assets. It’s time to roll back SAB 121 and to stop Gary Gensler’s overreach.”

.@SECGov has virtually locked out probably probably the most regulated institutions from serving as custodians for digital assets. It’s time to roll back SAB 121 and to stop @GaryGensler’s overreach. pic.twitter.com/n3xWRhPMWq

— Rep. Mike Flood (@USRepMikeFlood) February 29, 2024

Echoing the committee’s sentiments, the Chamber of Digital Commerce announced, “BIG NEWS! The bipartisan push from US Republican Wiley Nickel, US Republican Mike Flood, and Senator Lummis to nullify SEC’s SAB 121 has successfully passed markup and is on its method to the House floor.”

This development is seen as a pivotal moment for digital asset regulation, aiming to rectify the overreach of SAB 121, which has been criticized for its detrimental impact on consumer protection and the digital asset custody market.

Perianne Boring, the founding father of the Chamber of Digital Commerce, highlighted the importance of this legislative progress, stating, “PROGRESS: SAB 121 passed out of Committee today with bipartisan support! It’s headed to the House floor.”

This sentiment is shared by Jake Chervinsky, CLO at Variant, who criticized SAB 121 for being “an illegal rule adopted in violation of the Administrative Procedures Act and the Congressional Review Act that unfairly punishes crypto with none coherent justification.” Nevertheless, the renowned crypto lawyer also warned that that’s “likely the tip of the story in Congress. Getting repeal done is sort of inconceivable. Lawsuit or bust.”

Why Repealing SAB 121 Matters For Spot Bitcoin ETFs

The trouble to repeal SAB 121 is further justified by concerns over the concentration risk throughout the custody of bitcoin for ETFs. An op-ed by Wiley and Nickel in Newsweek emphasized the importance of involving banks throughout the custody of digital assets, citing the approval of 11 spot bitcoin ETFs as a step forward but not the tip of the regulatory journey.

Most notably, they highlighted that the approved ETFs rely on just 4 custodians, with a giant concentration in a single entity [Coinbase]. Moreover, Nickel and Flood identified the absence of banks as custodians for these ETFs, emphasizing that banks’ expertise and controlled framework make them ideal for such a job, particularly given the character of bitcoin as a bearer instrument.

They argue, “This concern is amplified by the undeniable incontrovertible fact that not one in every of the custodians are banks […] The SEC could have chosen to protect investors by simply rescinding SAB 121. Unfortunately, up to now, SEC chair Gary Gensler has not indicated interest in doing so.”

The op-ed identified SAB 121 as the primary barrier stopping banks from serving as custodians, since it requires digital assets to be included on banks’ balance sheets, diverging from the treatment of traditional securities and imposing undue capital and liquidity burdens on these institutions.

At press time, BTC traded at $61,286.

Featured image created with DALLE, chart from TradingView.com