The new era for the US Securities and Exchange Commission (SEC) began with undoing the wrongs orchestrated during Gary Gensler, notably repealing the controversial SAB 121 rule.
SEC Terminates SAB121
Under Mark Uyeba as acting chair, the SEC axed Staff Accounting Bulletin No. 121 (SAB121).
The controversial SAB121 stipulated stringent requirements that hindered financial firms from offering custody services. Crypto enthusiasts and lawmakers welcomed the withdrawal as a key win for the digital assets industry.
Repealing the SAB 121 starts undoing one of the most contentious policies Biden vetoed despite the Congress and Senate majority voting for its dissolution. The timing of the decision in the initial days of Trump’s return to the Oval Office suggests a shift in the administration’s stance on digital asset regulation.
Acting chair Uyeda spearheaded the SAB121 repeal to mark a symbolic conclusion of the regulation-by-enforcement profile as madness that characterized Gensler’s tenure.
Detailed SAB121 Journey
The SEC brought the contentious SAB121 in March 2022, directing financial institutions custodying clients to enter assets as liabilities on their balance sheets. The policy aimed to address the risks attributed to crypto custody services. The financial and crypto industries decried the rule as an impediment.
Crypto advocates considered the SAB121 impractical in its proposals, alleging it imposes unnecessary hurdles for financial firms. Additionally, its existence discouraged the firms from offering custody services to the crypto holders.
The Biden-Harris administration disregarded the resistance and pushed to implement the SAB121 policy in May 2022. The House Financial Services Committee (HFSC) head French Hill downplayed the objective of SAB121 from the onset. The HFSC chair profiled it as a misguided policy, supporting its repeal.
Hill added that rescinding the misguided SAB121 was inevitable since holding reserves against the digital assets in custody hardly shows standard financial service practice.
Gensler’s Approach to Crypto Regulation
SAB121 emerged as the subject of critics of Gary Gensler’s tenure, with the chair viewed as an inconsistent and heavy-handed stance to dismiss the calls for crypto-specific regulation. During Gensler’s tenure, the SEC chief claimed that existing financial laws were sufficient to govern digital assets. Nonetheless, the issuance of SAB121 contrasted this stance by imposing new restrictions without providing tailored guidelines and regulatory clarity.
The enforcement of the SAB121 rule attracted criticism, with the US largest crypto exchange, Coinbase, filing suit in 2023 to compel the US SEC to commit to regulatory clarity for the crypto sector.
The Brad Garglinghouse-led exchange submitted that the absence of comprehensive rules amplifies the vulnerability of crypto firms as they operate within the regulatory gray area.
The Commission downplayed the calls, insisting on mandatory compliance with the decades-old security laws. Coinbase indicated that the enforcement of SAB121 illustrates the SEC’s willingness to create new rules selectively. Crypto enthusiasts decried the SEC as portraying hypocrisy and inconsistency.
Ending Anti-Crypto Campaign
The swift action by Uyeda reignites the debate that featured during Resolution 109 in the 118th Congress when lawmakers offered a bipartisan solution to repeal SAB 121. The lawmakers, led by Senator Cynthia Lummis, expressed concerns that it bars banks from undertaking custodial services sought by eligible digital assets investors.
The lawmakers tore into the anti-crypto campaign profiled as Operation Chokepoint 2.0 by the Biden administration.
The initiative featured government agencies that warned and restricted the TradFi (traditional financial) firms from crypto-focused engagements. Its implementation effectively cut off the digital assets industry from accessing vital banking services.
Critics pointed to SAB121 as a key component of this strategy, aimed at stifling the growth of the crypto sector under the guise of investor protection.
With the withdrawal of SAB121, the Trump administration has sent a clear message that it intends to take a more constructive approach to crypto regulation, prioritizing innovation and collaboration over restriction.
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