💡Will Banks Soon Custody Bitcoin?

Issue 150

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Today’s Bullets:

• What is SAB 121 and Why Does It Matter?

• The SEC’s End Zone Run

• Continued Chokepoint 2.0

• Trump’s Executive Order

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Inspirational Tweet:

Let’s face it. Accounting is boring.

I mean, mind-numbing, energy-sucking, soul-crushing booooooooring.

Until, of course, it isn’t.

And in the case of Staff Accounting Bulletin No. 121, affectionately known as SAB 121 around these parts, I assure you. This accounting is anything but boring.

In fact, it’s a little like the Wild West recently.

But how, and why and what do we care anyway?

Don’t worry, we will get to all of that and more, super simply as always, here today.

So, grab yourself a big cup of coffee and settle into a nice comfortable seat for a safe viewing of regulator accounting hostility with this Sunday’s Informationist.

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🤓 What is SAB 121 and Why Does It Matter?

First things first, what exactly is Staff Accounting Bulletin No. 121?

SAB 121 was issued by the SEC in 2022 to ‘establish new accounting standards for companies safeguarding crypto assets for their customers’.

Remember the word ‘issued’, it’s important and we will come back to that.

In any case, the bulletin outlined a litany of SEC-perceived risks and measures for entities (i.e., commercial banks), as well as suggested remedies, to offset these so-called risks.

As you can see below:

You don’t need any banking experience or accounting knowledge to see the word ‘requirements’ listed four times, as well as ‘surcharge’ and ‘supervision’.

These are massive operational costs and hurdles, as well as imposed fiduciary risks that have been placed on banks and other entities operating in the crypto space.

But remember, this is a bulletin, mind you, not a piece of legislation. So companies can ignore it.

But they would do so at their peril.

Why?

Put simply, the SEC staff expects entities to align their financial operating and reporting with the interpretations provided in such bulletins.

Non-compliance could lead to increased scrutiny during SEC reviews and/or comments or requests for revisions to financial statements.

SO, ignoring SAB 121 is kind of like asking to be audited with a deep probe by the SEC.

And in that audit, if the SEC deems that non-compliance included material misstatements or omissions, it would lead to formal enforcement.

Enforcement means penalties, like fines, cease-and-desist orders, or other sanctions.

Fun!

So, while not legally enforceable, a bulletin such as SAB 121 carries significant weight and authority for entities involved in holding crypto-assets.

Getting back to the bulletin itself, how has the so-called recommendation impacted these entities?

The biggest impact of SAB 121 was that it required companies to report customer crypto holdings as both assets and liabilities on their balance sheets, while also implementing onerous risk disclosures.

In short, it scared banks away from touching the stuff.

And so, instead of entering this growing market, instead of expanding into crypto and Bitcoin, offering services, such as trading, custody, and lending, as well as other products or solutions, the largest and safest banks completely ignored it.

As a result, customers have missed out on:

• Custody services

• Trading with their own bank

• Lending platforms and services

• Insurance offerings

• And bundles of all the above

In other words, without SAB 121, by now it is likely that customers at large banks, like JP Morgan Chase, Bank of America, Wells Fargo, Citibank, etc., would be able to:

• buy, sell, or hold crypto directly through their existing bank accounts, making it easier to manage both fiat and digital currencies/assets in one place

• access new types of loans, such as Bitcoin-backed loans, with lower interest rates or more favorable terms than traditional loans—without selling the Bitcoin itself, making it a tax-advantaged strategy

• benefit from tighter regulatory oversight at GSIBs (Global Systemically Important Banks) and the reassurance that their holdings would not disappear in the case of a banking failure

In other words, without SAB 121, mainstream adoption of cryptocurrency and Bitcoin would likely have accelerated even faster than when the Bitcoin ETFs were launched last year.

Which may explain why Gary Gensler (former SEC Chief) pushed to do an End Zone Run around the House and Senate and just issue an official SEC Bulletin instead.

Let’s explore how SAB 121 came about in the first place.

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🤨 The SEC’s “End Zone Run”

See, rather than pursuing SAB 121 through legislation or formal rulemaking, the SEC instead just issued a staff accounting bulletin (SAB), claiming it to be an interpretation of existing Generally Accepted Accounting Principles (GAAP).

By doing this, the SEC completely bypassed Congress and any public comment periods, and instead it fast-tracked (read: strong-armed) its implementation.

Some concerns of the SEC’s actions:

• Lack of Due Process: By circumventing Congress, the SEC ignored the proper legislative process

• Regulatory Overreach: SAB 121 effectively created new laws through the threat of enforcement

• Economic Impact: The crypto industry, already under pressure from Chokepoint 2.0, faced even more operational burden due to SAB 121

And because of this, SAB 121 came under severe criticism from the crypto and Bitcoin industry, and eventually came under legislative review by both the House and the Senate.

At least for legislators who were concerned with Chokepoint 2.0 and the continued overreach of the SEC.

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😵 Continued Chokepoint 2.0

Ah yes, Chokepoint 2.0.

For this of you who don’t know what this is and the background, here’s a quick summary.

Chokepoint 1.0

Chokepoint 1.0 was an Obama-era initiative led by the Department of Justice (DOJ) and banking regulators, launched in 2013 to target industries deemed high-risk for financial crimes, such as fraud and money laundering.

By pressuring banks and payment processors to cut ties with companies involved in things like payday lending, firearms, and pornography, regulators effectively ‘choked off’ their access to financial services.

But it was done without directly banning the industries.

Which allowed regulators to completely sidestep any legislative process to implement the restrictions.

Under severe criticism, Chokepoint 1.0 ended in 2017.

Chokepoint 2.0

Chokepoint 2.0 refers to an extremely similar initiative, this time focusing on digital assets and the crypto industry.

Regulators, including the SEC, Federal Reserve, and FDIC, have used identical tactics to limit the growth of the crypto industry by strongly discouraging banks from servicing crypto-related businesses and imposing stringent compliance requirements.

Like SAB 121.

One difference, unlike Chokepoint 1.0, which involved explicit DOJ coordination, Chokepoint 2.0 has been implemented with somewhat secretive guidance.

Even so, enforcement actions and regulatory uncertainty have been pretty powerful and effective in dissuading banks and institutions from working with the crypto industry.

I experienced it myself with my first hedge fund, the Bitcoin Opportunity Fund, and wires being canceled, refused, or ignored from traditional banks.

It was a massive headache that we eventually overcame, but not without significant challenge.

In any case, Chokepoint 2.0 has been outed, along with Senator Warren and her self-dubbed ‘Anti-Crypto Army’.

It is all coming to light, and the pushback started with Legislators voting to Repeal SAB 121 last year.

First, the repeal passed the House.

Then it passed the Senate:

Lawmakers basically slapped down Gensler and the SEC, voting that the SEC had exercised serious regulatory overreach.

And mere days later, President Biden, presumably under advisement of Elizabeth Warren and her short-sighted and vindictive committees, vetoed Congress’s overturning of the resolution.

SAB 121 was immediately back in business.

So let’s recap:

SEC issues SAB 121 as a bulletin of ‘guidelines’, doing an end zone run around Congress → Congress strikes down SAB 121 through a legislative process and a vote → Biden vetoes the resolution to overturn SAB 121, and reinstates it

Then, tens of millions of crypto and Bitcoin voters recognize the antagonistic posture of Biden and the Democrats, and Donald Trump, having fully embraced crypto and Bitcoin—and even attended the 2024 Bitcoin Magazine conference in Nashville—is elected the next President.

By the time you read this, it will be one day until Trump re-takes the Oval Office.

And the question is, what happens to Chokepoint 2.0 and SAB 121?

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🥳 Trump’s Executive Order

Even before Trump has taken office, we have seen plenty of evidence that Chokepoint 2.0’s days are numbered.

It’s pretty much been dissolved as we speak.

Also, as you saw in today’s Inspirational Tweet, the Washington Post reported that one of the first Executive Orders that Trump will issue is to overturn the Biden Veto of the repeal of SAB 121, and eliminate the SEC’s bulletin for good.

I personally believe this is an extremely big deal for the Bitcoin and overall crypto industry.

As I said above, this will not just help usher in a host of consumer products and solutions around crypto, this will absolutely fuel the widespread and mainstream adoption of cryptocurrencies and, especially, Bitcoin.

Why?

Once given the green light to operate normally and without threat, imagine how hard the big banks will push these products onto consumers.

Trading, custody, lending, etc.

And bundling these services together.

If you are an everyday person and are not yet knowledgable about Bitcoin, for instance (i.e., you don’t follow me on X or read this newsletter regularly), then having your big trusted bank be the one to pitch it to you as something that they are involved in will be a huge endorsement.

I can’t tell you how many times I hear: How do even buy Bitcoin?

Well, if Chase let’s you do it through its own phone app and you just hold it right there in your Chase account, alongside your savings account, auto loan account, and mortgage account, etc, then it all seems super safe and legit and easy.

And then they will eventually let you borrow against it.

Without having to sell it. Taking a tax hit on it.

Wait, I thought that kind of tax and asset tactic was reserved for just the super rich.

Well, that is one of the things that Bitcoin is trying to solve, right there.

And having SAB 121 repeal un-vetoed and discarded again, this time through Executive Order, opens the doors to this kind of mainstream consumer adoption and solutions.

The first nail is already in Chokepoint 2.0 with Trump appointing crypto and Bitcoin friendly people in positions of power within the next administration.

Warren has been put on notice.

The Democrats are starting to realize their errors underestimating the strength of crypto and Bitcoin votes and trusting Warren on the Crypto-Army Crusade.

Heck, we may even get a US Bitcoin Reserve this year, it’s possible.

But first, I’ll take the Executive Order to eliminate SAB 121.

It’ll be the first strong and extremely important step in signaling that the new administration really is crypto and Bitcoin friendly.

Beyond just creating a $Trump coin to cash in on all those votes for them.

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That’s it. I hope you feel a little bit smarter knowing about SAB 121 and how it has already and may no longer negatively affect you.

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Talk soon,

James✌️