SAB 121 Is Gone

Michael Saylor previously laid out his 3 key catalysts for what would drive Bitcoin to a price of $5 million per coin. The 3 keys were:

• The approvals of spot Bitcoin ETFs ✅

• A change to the fair value accounting for Bitcoin balance sheet holdings ✅

• The repeal of SAB 121 so that banks could custody Bitcoin ✅

As of last week, the last of the 3, has officially occurred. President Donald Trump signed an executive order that repealed SAB 121.

SAB 121 (Staff Accounting Bulletin 121) was introduced during Gary Gensler’s tenure at the SEC and outlined significant restrictions on financial institutions that wanted to custody Bitcoin. Under SAB 121, banks had to classify Bitcoin, and other cryptocurrencies, as a liability on their balance sheets. This meant that for every dollar worth of Bitcoin they held, they were required to offset it with an equivalent amount of capital (treasuries or other assets were the typical way). What this requirement effectively did was make banks opt out of offering Bitcoin-related services entirely. SAB 121 was a nearly impossible mountain to climb for any banks that considered dipping their toes into the Bitcoin industry. SAB 121 was an attack on the Bitcoin and crypto industry aimed at preventing banks from getting involved.

Interestingly enough former President Biden vetoed a resolution passed by both houses of the US Congress that would have repealed SAB 121 in the early parts of 2024. Today is not the past and the current administration has given strong signals, both in their words and their action, that they aim to support crypto and AI, and not establish roadblocks that deter innovation or adoption.

With the rescinded SAB 121 comes the now-in-place SAB 122. SAB 122 removes the balance sheet recognition requirement that required banks to consider Bitcoin as a liability and pair every dollar of their “liability” with a dollar of an asset. Now, banks can choose to custody Bitcoin and can freely begin exploring products for their customers. The removal of SAB 121 is another glaringly obvious sign that institutional adoption of Bitcoin is only going to continue. JPMorgan and other, huge, institutions are already chopping at the bits to enter the Bitcoin industry.

With big banks entering the fold, financial instruments like loan products and derivatives become the logical next product offerings. Additionally, just like the Bitcoin spot ETFs, banks being allowed to custody Bitcoin is another signal to the world that Bitcoin is not only legitimate but here to stay. A more abstract idea is that the change from SAB 121 to SAB 122 is less of a political move and more of a market move. There is no denying how successful the Bitcoin spot ETFs were for Wall Street firms. Projecting out to the future, I believe the banks will see a similar level of success. With this potential success and the future growth of the entire industry, Bitcoin being opened up as a new source of income and customers for banks is something they will not want to turn their back on anytime soon. Jerome Powell seems to agree as he said, “Banks are perfectly able to serve crypto customers.”

It’s worth noting that banks holding Bitcoin require regulation and other preventative measures to ensure that customers’ funds are safe and not taken advantage of. The reason for this is that many banks engage in a practice of “rehypothecation” where the banks reuse their customers’ assets to finance their own trading and lending activities. In short, the crypto industry has already been impacted by this sort of fractionalized lending. FTX, one of the world’s biggest crypto exchanges blew up because they were lending and trading their customers’ assets and could not make due on withdrawal requests.

The reason that regulations, such as banning the rehypothecation of Bitcoin, should specifically be passed is that no government, entity, or individual can choose to print more Bitcoin. There is no “bailout” money with Bitcoin like there was in 2008 and 2009 during the financial crisis. There will be nothing the government can do (except print dollars), to help out a bank that lost their customers’ Bitcoin due to trades gone poorly. The fractionalized lending that banks currently operate on when using dollars is impossible with Bitcoin. Instead of waiting for the banks to understand this via a bankruptcy proceeding, regulations should be put in place to prevent the worst from happening.

The regulations I bring up are regulations that aim to protect the customers. These regulations are much different than what SAB 121 aimed to do, which was to completely deter banks and therefore their customers from entering an industry.

Regardless of my desire for clear regulations on how banks manage the Bitcoin they custody, there is an undeniable level of optimism that comes from seeing SAB 121 repealed. What aimed to choke corporations and key industry players out of Bitcoin, is now gone. This is yet another signal to the world that Bitcoin is here to stay.

Stack SATs.

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