When 11 spot Bitcoin ETFs launched last month, not one of them had a bank as custodian for the underlying crypto. A big factor in this is the SEC’s Staff Accounting Bulletin (SAB) 121 relating to the custody of cryptocurrencies. It makes providing crypto custody services prohibitively expensive for banks. In late October 2023, the Government Accountability Office (GAO) ruled that SAB 121 should have been subject to Congressional review. Now lawmakers in both the House and the Senate have taken formal steps to reverse the rule.
The vast majority of Bitcoin ETF crypto is custodied by Coinbase. Many believe this is far too concentrated and not helpful for consumer protection. Custodial banks have far higher budgets to deal with cybersecurity. Consider if a bank held the Bitcoin in custody for the BlackRock spot Bitcoin ETF (iBIT), which has $2.85 billion in assets. A bank custodian would have to set aside $2.85 billion in capital. That’s clearly not viable.
“SAB 121 has massive implications, and the SEC should have received feedback on it from the federal banking regulators and the public before implementing this legally binding directive,” said Senator Lummis. “I have serious concerns over the impact of this bulletin on consumer protection and ensuring well-regulated financial institutions are able to provide safe custody for Americans’ hard-earned financial assets.”
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