Duane Morris LLP - What To Expect In Crypto Banking After SEC Nixed Guidance

In March 2022, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 121. The bulletin placed a significant restraint on the ability of banks to maintain custody of cryptocurrency assets on behalf of customers by requiring a reporting company bank to reflect both an asset and a liability, for which the bank must reserve capital on its balance sheet even though it is not the owner of the crypto.[1]

By large margins, the U.S. House of Representatives and the U.S. Senate took action last year to pass H.J. 109 disapproving of SAB 121,[2] but then-President Joe Biden vetoed the resolution, and it was not taken up by Congress again.

With President Donald Trump sworn into office in January and Gary Gensler no longer the chair of the SEC, the attitude of the SEC on the point has markedly shifted. In Staff Accounting Bulletin 122, issued on Jan. 23, the SEC rescinded SAB 121 and removed reference to it in the SEC's Staff Accounting Bulletin Series.[3]

Such recission applies to annual periods beginning after Dec. 15, 2024, and may be applied retroactively for prior periods that are reported after the effective date of SAB 122. The move was quickly applauded by the American Bankers Association and praised by others as a positive development for growth and innovation.[4]

Nonetheless, a note of caution is in order. Recission of SAB 121 does not completely absolve a reporting company from recognizing a liability relating to crypto custody activities.

As described in SAB 122, applicable accounting principles and standards may continue to affect whether a reporting company should report a contingent liability on its balance sheet relating to the risks incurred in engaging in cryptocurrency activities and the method for measuring the amount of such liability. Still, it is unlikely that such requirements would require the one-to-one asset to liability ratio that SAB 121 imposed.

A more significant hurdle potentially arises from the federal regulators that directly supervise banks. Guidance released by the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation has shifted in the past regarding banks engaging in cryptocurrency activities.[5]

Preliminary guidance around 2020 seemed cautious but positive.[6] Later guidance was less clear. Although the agencies stated generally in a January 2023 joint statement that banks "are neither prohibited nor discouraged from providing banking services to customers of any specific class or type," they expressed their view that cryptocurrency activities are "highly likely to be inconsistent with safe and sound banking practices."[7]

In particular, the FDIC sent private, direct supervisory letters to numerous financial institutions requesting that they "pause, or not expand, planned or ongoing crypto-related activities." In an evaluation report in October 2023, the FDIC Office of Inspector General criticized the indefinite pause process and recommended that certain steps be taken by the FDIC to conclude its review and provide clear guidance for banks to evaluate. This apparently did not happen.

The pause not only affects banks that want to engage in cryptocurrency activities, but digital asset companies that want banking services as well. On June 27, 2024, History Associates Inc. brought suit in federal court on behalf of Coinbase Inc. to compel the FDIC to provide copies of the pause letters under the Freedom of Information Act.

In December 2024, and again on Jan. 3, 2025, the FDIC published redacted copies of some, but not all, of the pause letters.[8] It also provided a redacted 2022 internal memorandum describing the procedures to be followed by its regional offices and detailed questions to pose to banks as part of the supervisory process.[9] Coinbase is trying to make the case that the FDIC has been actively engaged in debanking companies in the crypto space.

With the SEC no longer enforcing SAB 121, scrutiny will continue to turn to bank regulators. To a certain extent, SAB 121 allowed bank regulators to take a wait-and-see approach with regard to cryptocurrency activities.

Now that SAB 121 no longer restricts crypto banking activities, pressure will likely mount on the FDIC, the FRB and the OCC to follow through on their prior guidance with clearer, more concrete standards that neither prohibit nor discourage all crypto banking activities but allow banks to develop appropriate activities in a way that is consistent with safe and sound banking practices.

Already in the first few weeks of the Trump presidency there has been a considerable shift in tone. Travis Hill was appointed as the acting chair of the FDIC on Jan. 20, and issued a statement the next day listing what he expects to be among the FDIC's priorities.[10]

According to Hill's statement, the FDIC should adopt "a more transparent approach to fintech partnerships and to digital assets and tokenization," and "[w]ork to ensure law-abiding customers have, and do not lose, access to bank accounts and banking services." Perhaps in a nod to the concern over pause letters, he went on to state that the FDIC should "[i]mprove the supervisory process to focus more on financial risks and less on process."

Other priorities potentially affecting crypto activities by banks include pursuing "adjustments to our capital and liquidity rules to appropriately balance driving economic growth with ensuring safety and soundness and resilience to shocks." This goes hand in hand with one of his stated goals of studying "deposit behavior to develop a more sophisticated understanding of the relative stability of different types of deposits and depositors."

On Feb. 3, Coinbase pushed the regulators for more clarity,[11] and two days later the FDIC released 175 documents as part of the History Associates/Coinbase FOIA request.[12] Hill acknowledged in his related statement that the documents show that "requests from these banks were almost universally met with resistance" and "sent the message to banks that it would be extraordinarily difficult — if not impossible — to move forward."[13]

As a preview of potential changes to come, Hill noted that the FDIC may replace its prior Financial Institution Letter 16-2022 (implementing the pause process) with "a pathway for institutions to engage in crypto- and blockchain-related activities while still adhering to safety and soundness principles."[14]

One might expect strong statements from an appointee of the new administration, but similar, though more measured, sentiments have been expressed by Federal Reserve Chair Jerome Powell. At the Federal Open Markets Committee meeting on Jan. 29, the main focus of attention was on interest rates and monetary policy.

At the end of the press conference, Powell was asked to talk about cryptocurrency risks as outlined by the Financial Stability Oversight Council in its annual report.[15] In his remarks, Powell downplayed the issue of debanking of crypto customers, stating that "banks are perfectly able to serve crypto customers … a good number of our banks that we regulate and supervise do that."

With respect to banks themselves engaging in crypto activities, he took a firmer stance, but in a nonconfrontational way. Crypto activities per se are not bad, but "they're so new and we don't want to make a mistake." In particular, he noted the risks of exposing "the Federal safety net, with deposit insurance" to activities that may not be safe and sound.

He concluded his remarks by agreeing that "it would be helpful if there were a greater regulatory apparatus around crypto." He then deflected on the issue and noted, "I think that's something Congress was working on quite a lot. We've actually spent a lot of time with members of Congress working together with them on various things and I think that would be a very constructive thing for Congress to do."

As a Fed chair who likely will not serve in such position after May 15, 2026, Powell appears to be communicating that he is not standing in the way of crypto change, but he is not leading the charge, and the ramifications of such change will likely play out after his tenure.

For its part, Congress has recently announced several bold crypto initiatives that affect banking.

On Feb. 4, Sen. Tim Scott, the Republican chair of the Senate Committee on Banking, Housing and Urban Affairs; David Sacks, the new White House crypto czar; Sen. John Boozman, Republican chair of the Senate Agriculture Committee; Rep. French Hill, Republican chair of the House Financial Services Committee, and G.T. Thompson, Republican chair of the House Agriculture Committee, held a joint press conference announcing that a new bicameral working group will be created to focus on digital assets.[16]

In particular, they plan to work on two pieces of legislation, a crypto market structure bill and a stablecoin bill. The crypto market structure bill is expected to be based on the H.R. 4763 bill that passed the House last year but stalled in the Senate.[17] The Guiding and Establishing National Innovation for U.S. Stablecoins, or GENIUS, Act was introduced by a bipartisan group including Sens. Tim Scott, Bill Haggerty, Cynthia Lummus and Kirsten Gillibrand on the same day.[18]

The missing piece of the puzzle is the OCC. The OCC has been largely silent since its last joint statement on crypto-asset risks with the FRB and the FDIC in 2023. However, it is in a unique position, since the OCC has been regulating at least one crypto company since 2021.[19] This supervisory experience can help bridge the gap between theoretical risks and actionable guidance and provide the practical insight necessary to implement a broader regulatory framework for an expanding market.