Alterations to the Institutional Crypto Market due to SAB 121's Revocation: Identifying Three Key Changes
The abolition of the U.S. Securities and Exchange Commission (SEC)'s Staff Accounting Bulletin No. 121 (SAB 121) on January 23, 2025, in favor of Staff Accounting Bulletin No. 122 (SAB 122), marks a transformative milestone for institutional adoption of cryptocurrency. This policy shift from the new Trump Administration dismantles one of the primary regulatory hurdles that had hindered large financial institutions from handling cryptocurrency assets. This significant move paves the way for an influx of traditional financial service providers into the market, consequently boosting liquidity, legitimizing cryptocurrency as a legitimate asset class, and accelerating institutional adoption at an unprecedented pace.
What Was SAB 121?
Issued on March 31, 2022, SAB 121 mandated public companies that held cryptocurrencies on behalf of their customers to record customer-held cryptocurrency assets on their balance sheets as both an asset and a corresponding liability at 'fair value.' This requirement led to laborious accounting procedures and escalated capital and compliance demands, discouraging banks from offering cryptocurrency custody services.
The termination of SAB 121 alleviates this burden, offering a clear path for banks and large custodians to enter the cryptocurrency market on a large scale.
Paving the Way for Larger Players
Through exploration of tokenized real-world assets, many large banks and traditional financial services have already constructed the infrastructure required to uphold digital asset custody. For numerous entities, extending these platforms to cryptocurrencies is a logically straightforward step, with several banks ready to make their presence felt in the market.
For instance, Bank of New York Mellon (BNY) currently supports 80% of the approved Bitcoin and Ether Exchange Traded Products (ETPs) through its fund services business. The financial institution has declared its intention to extend these services to cryptocurrency custody, signaling their readiness to join the cryptocurrency sector.
The entry of such prominent and reliable brands will reconfigure the competitive landscape, increasing the competitive pressure on crypto-native custodians. The increased competition will drive innovation, lower custodial fees, and minimize the concentration risk in the global Exchange Traded Fund (ETF) market, where Coinbase currently serves as the custodian for a considerable percentage of BTC and ETH assets under management for crypto ETFs.
New Participants to Bolster Liquidity and Propel Growth
As traditional financial institutions commence offering cryptocurrency custody services, a wave of new investors will be drawn into the cryptocurrency market. The reassuring presence of these well-regulated brands will propel interest from institutional investors, pension funds, alternative asset managers, and hedge funds.
This influx of institutional investment and capital will bolster market liquidity, reduce volatility, and promote price discovery. Additionally, the presence of major financial institutions will encourage the development of new cryptocurrency investment vehicles, stablecoin custody, cryptocurrency lending, staking services, and digital asset-backed financial products.
By liberating institutional capital, cryptocurrency markets will evolve beyond their traditionally retail-driven nature, ushering in a more stable, sophisticated, and mature financial system.
Regulatory Clarity on the Horizon
This development also marks the beginning of a broader shift towards a more pragmatic regulatory environment in the United States. SEC Commissioner Hester Pierce acknowledges that the Commission's handling of cryptocurrency has been characterized by legal vagueness and commercial impracticability. In response, she outlined a list of regulatory review and refinement areas, including coin and token offerings, cryptocurrency lending, and staking. Increased regulatory clarity and certainty in these areas will continue to foster institutional participation and broaden market growth.
Conclusion
The demise of SAB 121 signifies more than just a policy alteration - it holds monumental implications for the institutional cryptocurrency landscape. With major banks entering the custody scene, institutional capital pouring into the market, and a more transparent regulatory framework emerging, cryptocurrency stands on the brink of mainstream acceptance.
- By 2025, with the abolition of SAB 121 and the shift towards SAB 122, traditional financial service providers like the Bank of New York Mellon (BNY) are expected to accelerate their entry into the cryptocurrency market, thereby legitimizing cryptocurrencies as a legitimate asset class.
- The termination of SAB 121, which previously imposed laborious accounting procedures and escalated capital and compliance demands, is expected to lead to an unprecedented pace of institutional adoption of cryptocurrencies, potentially marking a watershed moment in the industry's history.
- Following the abolition of SAB 121, securities regulators, such as Commissioner Hester Pierce, are likely to engage in regulatory review and refinement in areas like coin and token offerings, cryptocurrency lending, and staking, aiming to provide increased clarity and certainty, further propelling institutional participation and broadening market growth.
