US SEC Holds Firm on Crypto Custody Rule

The United States Securities and Exchange Commission (SEC) remains firm on its stance regarding crypto custody for regulated financial institutions, as SEC Chief Accountant Paul Munter confirmed during a recent speech. His remarks focused on Staff Accounting Bulletin No. 121 (SAB 121), a rule introduced in March 2022 that has sparked significant debate.

Munter’s statement emphasized that entities holding crypto assets for others must record a liability on their balance sheets. This position, central to SAB 121, has been a point of contention, as it effectively prevents many regulated financial firms from offering crypto custody services.

The SEC official argued that entities safeguarding digital assets bear responsibility for potential risks, and this should be reflected in their financial statements. By requiring these companies to record liabilities, the regulators seek to ensure that institutions are adequately prepared for the risks associated with crypto custody.

A Pushback and the Regulator’s Insistence

This stance has faced pushback from various quarters, including SEC Commissioner Hester Peirce. Peirce expressed concerns about the content and the process behind SAB 121. Nate Geraci, President of the ETF Store, also weighed in, adding that the SEC seems “dug in” on SAB 121.

He added that the agency is unwilling to allow regulated financial institutions the flexibility to provide crypto custody services. His remarks reflect the sentiment among some industry participants who believe the regulator’s position is too restrictive.

Although the SEC has faced challenges to its guidance, including a vote by the US House of Representatives to overturn the rule in May, the agency’s position remains unchanged. Moreover, President Joe Biden vetoed the repeal in June, ensuring SAB 121 continues to govern crypto custody regulations for now.

Notably, the SEC has acknowledged that not all crypto custody arrangements fit neatly into SAB 121’s framework. Munter pointed out that bank holding companies offering bankruptcy protection for crypto assets do not need to record a liability.

Similarly, broker-dealers facilitating cryptocurrency transactions without holding cryptographic keys could be exempt from the requirement. Despite the pushback and efforts to change the rule, SAB 121 remains a critical element of the regulatory agency’s approach to regulating cryptocurrency custody for banks and other financial institutions.

US SEC Crypto Enforcement Soars to $4.7 Billion in 2024

Meanwhile, the SEC has significantly ramped up its crypto enforcement actions in 2024, hitting nearly $4.7 billion in penalties. This marks an increase of over 3,000% compared to 2023.

The most substantial contribution to the SEC’s funds came from a record-breaking $4.47 billion paid by Terraform Labs and Do Kwon, its ex-CEO, in June. The settlement reflects a growing focus on tackling larger and more influential crypto cases.

In total, the regulators initiated 11 enforcement actions in 2024, representing a 3,018% increase in penalties despite handling fewer cases compared to the previous year. In 2023, the regulators took 30 actions but only imposed $150.3 million in fines.

SEC Shifts Focus to Larger, High-Impact Cases

Moreover, a report from Social Capital Markets highlighted the shift in the SEC’s strategy toward pursuing high-impact enforcement. Rather than spreading resources across many smaller cases, the regulator is now focusing on fewer cases but imposing larger financial penalties on those found guilty.

The rise in penalties is not without precedent. In 2019, the SEC fined Telegram $1.24 billion, which included $18.5 million in civil penalties and $1.2 billion returned to investors. This action helped push the average fine for that year to over $70 million, a substantial increase compared to earlier years.

While 2024’s fines have reached unprecedented levels, not all cases involve massive sums. Since 2020, 46% of the US regulator’s fines were below $1 million, and 30% were between $1 million and $10 million.

However, the Terraform Labs settlement has inflated the overall average fine, bringing the average enforcement action in 2024 to over $420 million. Other notable financial penalties over the past few years include actions against Ripple Labs, GTV Media Group, and con artists Tina and John Barksdale.

These cases, which exceeded $100 million in penalties, have also contributed to the regulator’s increasingly aggressive stance on cryptocurrency regulation. As the SEC pushes forward with its cryptocurrency enforcement efforts, companies in the sector are likely to face increasing pressure to comply with its rules.