SEC Paves Way for Banks to Custody Digital Assets

Under the new administration, the Securities and Exchange Commission has repealed its SAB 121 ruling which required custodians to recognise all digital assets as liabilities on their balance sheets, and imposed large capital costs. The repeal paves the way for regulated banks to hold clients' digital assets in custody, which is critical for institutional investors in traditional finance to enter the new markets.

In 2024 Ripple Custody estimated that the amount of crypto assets in custody is expected to reach at least $16 trillion by 2030, and that 10% of the world's GDP is expected to be tokenized by 2030. Therefore, companies will need secure, compliant and flexible options to store their crypto.

Danny Marques at EY said: "It legitimizes bitcoin's role within TradFi and over time we will 100% see banks serve as conduits for BTC adoption offering custody services, facilitating Bitcoin-backed loans, and even integrating it into their treasury management strategies. It won't happen overnight but this is how bitcoin becomes part of the fabric of the financial ecosystem, and bridging the gap between the old and the new."

Morgan Krupetsky, senior director of business development for institutions & capital markets at AvaLabs, which builds blockchain technology, said:

Preston Pysh, co-founder of The Investor's Podcast Network (TIP), warned: "Investors, institutions, and retail consumers alike may rejoice at the newfound "legitimacy" that comes with big banks stepping into digital asset custody.However, the implications of this regulatory about-face come with enhanced responsibility that I suspect many aren't prepared for."

Rehypothecation is a common practice in traditional finance where a brokerage or bank that holds a customer's collateral, then uses that same collateral to secure its own loans or financial dealings. However, there is no lender of last resort in crypto markets and a limited supply of bitcoin, which will lead to defaults in stressed markets.

"High-profile collapses such as FTX, BlockFi, and Genesis have taught us the same lesson over and over: under-collateralized, fractional-reserve practices wrapped in complicated financial engineering spells calamity for depositors and investors," said Pysh. "Such a crisis could ripple through financial markets, and ultimately harm millions of people who have outsourced their trust to institutions who have "gambled" away their savings."

Pysh warned that Congress must pass legislation that bans the rehypothecation of Bitcoin outright for all institutions, from small retail lenders to systemically important banks.

Better Markets, a non-profit founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, said: "The SEC should be taking action to protect investors from the fraud that pervades the crypto industry. Instead, in one of its first actions under the new administration, the SEC has made it more likely that investors will suffer from a failure to insulate the financial system from the risks crypto poses and the next crypto crash."

Senator Cynthia Lummis, first chair of the new Subcommittee on Digital Assets, said: =

Executive order

President Trump's new Executive Order also established a working group to create a federal framework for crypto and digital assets, and banned a central bank digital currency (CBDC).

CryptoUK, trade body representing the digital asset sector in the UK, said: "As the UK and Europe continue their investigations into a digital pound and digital euro, the U.S.'s anti-CBDC stance raises critical questions about the future of global digital finance. Will this divergence lead to fragmented regulatory ecosystems, or could it drive innovation in decentralized financial technologies while reshaping the trajectory of CBDC adoption worldwide?"

The Kobeissi Letter, a commentary on global capital markets, said:

Sergey Nazaro, co-founder ofChainlink, which provides technology to bring the world onchain, said: