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25th January 2025 > > SAB 121.

tl;dr

It’s all about accountancy today. If that isn’t your bag (I think it should be) then let’s skip over the details – all good for cryptos.


Actually, more than that.


A game-changer for cryptos.


Market Snap


Market Wrap

Seven straight days of inflows to the spot BTC ETFs totalling over $4bn is pretty impressive, implying that demand is running at around 10x the supply of new coins.


Curious Cryptos’ Commentary – SAB 121

On my gosh, I am mortally embarrassed.


Having banged on about the iniquities of SAB 121 for years now, I missed the most important bit of news – two days ago SAB 121 was finally killed off (h/t Martin Foley). I hope you find it in your hearts to forgive this inexcusable transgression of mine.


I did recently say that I will be mightily pleased to never talk about SAB 121 again. Well, folks, this looks like today is the last time ever.


It is of paramount importance that everyone understands what the removal of this key plank of Operation Choke Point 2.0 means for cryptos in general. You are going to be mightily pleased, but to fully understand the ramifications, we must first explore how custody, and its closely related cousin repo, work in TradFi markets.


Those of us of a certain age will recall the pain of buying stocks and shares back in the day. One would fill out a paper form stating the name of the company, the desired number of shares, the maximum price to be paid, and send it off to a stock broker accompanied by a cheque for the total amount plus fees. Forget internet broking, telephone broking was restricted to a few select and lucky individuals.


If your order was filled, you would receive a share certificate in the post, plus a cheque for any reduction in the total cost compared to the maximum you were prepared to pay.

Safe storage of that certificate was key – you could only sell the stocks you now own by sending it back (in the post) to the broker. If you lost it, it could be replaced, but at a cost of not just cash, but a whole load of your time too. If you tried to scale up this process for institutional investors, and professional managers, the system would collapse, forming a financial black hole, and a real one at that.


To resolve this problem, regulated banks stepped in to provide custodial services. For a (very small) fee, the bank would provide secure and insured custody of a range of financial products, including storing physical gold. These assets were legally ring-fenced from the activities of the bank, and audited on a constant basis. No-one would think of using an unregulated firm for custody. Or rather, no-one who understands the necessity of secure custody would ever do so.


An efficient and cheap process for custody of financial assets plays a key role in attracting investors and so reducing the cost of capital for all businesses, increasing investment in R&D, increasing wages for current employees, increasing the number of employees, and increasing the returns to shareholders.


We all benefit as a result.


The repo market is the glue that holds the global banking system together. The volume of transactions both in number and in value are simply astonishing. A significant proportion are short-term even to the extent of being overnight. Some trades are much longer. What the repo market does is to allow banks to ensure they can match all required cash flows at the end of each day, the importance of which cannot be underestimated. Bank run, anyone?


Custodial services are at the heart of the repo market.


The repo market dramatically reduces the cost of capital for the banking industry, a reduction that is passed onto clients, again reducing the cost of capital for businesses. Which, as we know already, makes us all wealthier.


Finally, back to SAB 121 (“phew” I hear you say, or at least those of you who are still here with me).


When a regulated entity provides custodial services for its client, it has no exposure to the market value of those assets – market risk remains with the legal owner. Those assets rightly do not appear on the balance sheet of the custodian.


SAB 121 targeted cryptos by demanding that crypto assets appear on the balance sheet of the custodian. Which is nonsensical of course, because that means the same crypto holdings turn up on two balance sheets – that of the custodian and that of the legal owner. Not since the invention of double entry bookkeeping in 1494 by a colleague of Leonarda da Vinci has such an obvious misstatement of assets and liabilities ever been contemplated.


These accounting anomalies and intricacies were of no interest to Gensler when, as Chair of the SEC, he introduced SAB 121. Happy to ignore many centuries of accounting good practice, he knew full well that regulated banks could never provide custodial services for cryptos under this regime. Operation Choke Point 2.0 was fully revved up by SAB 121.


Before Gensler was branded as “arbitrary and capricious” for the first time by a judge, SAB 121 prevented any institutional involvement in cryptos. That judge’s opinion of him paved the way for the launch of the phenomenally successful spot BTC ETFs, but we have to remember that ETFs are mostly a retail product. Institutional clients can dabble, and then some, using ETFs, but ETFs are not a means to wholesale institutional adoption, an outcome to which SAB 121 remained the biggest barrier.


Until now.


SAB 122 replaces its disgraced earlier iteration:



Two of our favourite politicians, Hester and Cynthia, tell us like it is:

This is a game-changer for institutional involvement in the crypto markets.


We will soon see an array of custodial services launched by regulated banks aimed at big clients, who will be able to securely invest in a range of cryptos in a way that has previously been denied to them with the added benefit that this will bring cryptos into the heart of the TradFi banking system.


If you don’t believe in the crypto revolution, and you don’t believe that institutional money has any interest in investing in cryptos, then this is a non-event. I see it very differently. I guess we will find out soon enough who is right.

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