SEC Grants Exemptions and Workarounds for Crypto Asset Reporting Requirements
SEC Grants Exemptions to Financial Institutions for Crypto Asset Reporting
The Securities and Exchange Commission (SEC) has made a significant shift in its regulatory approach to the crypto industry. After facing backlash over Staff Accounting Bulletin 121 (SAB 121), which imposed onerous accounting obligations on companies holding crypto assets for platform users, the SEC has decided to grant exemptions and workarounds to large traditional financial institutions.
The controversial SAB 121, published in 2022, required financial institutions to disclose liabilities for every customer asset held in a custodial arrangement, as well as additional disclosures on the risks of holding crypto assets. This rule was met with bipartisan opposition and was only narrowly saved from being vetoed by the White House.
The recent announcement of exemptions from SAB 121 reporting and compliance requirements is a welcome relief for the crypto industry and its advisers. Institutions seeking to circumvent SAB 121 must meet certain conditions, including having policies to safeguard customer assets in case of bankruptcy and establishing internal controls to protect assets in the event of bank failure.
The new measures will primarily impact some of the largest traditional financial institutions in the US, especially banks looking to expand their involvement in the crypto asset sector. With the approval of bitcoin spot exchange-traded funds and the potential for ether ETFs, banks have been eager to tap into the lucrative crypto market.
The exemptions granted by the SEC will allow banks to offer custodial and other crypto services without triggering additional capital requirements under banking regulations. While the SEC is easing some reporting requirements, it still expects institutions to have substantive controls and disclosure measures in place.
The changes in regulatory attitude and action by the SEC signal a positive shift for the crypto industry. As financial services firms gain confidence in dealing with crypto assets, other industries and customers are likely to follow suit. While these exemptions are not a universal solution to all crypto reporting and compliance issues, they represent a step in the right direction.
Advisers in the crypto space are already assisting client firms by focusing on the fundamentals of crypto products, developing specific controls, and emphasizing clear communication. The exemptions to SAB 121 provide a much-needed reprieve from the burdensome rule and pave the way for more effective and reasonable regulation in the crypto industry.
Overall, the SEC’s decision to grant exemptions to financial institutions for crypto asset reporting is a positive development that will benefit both the industry and its stakeholders.