As a financial regulation lawyer, I can confidently say that financial regulation is one of the most boring subjects on the planet. Some aspects of the field, such as regulatory capital requirements, are incredibly boring and typically the domain of only lawyers who are not only nerdy, but can be seen to be nerdy from a few hundred yards away without visual aids.
But in rare cases, financial regulation has a profound effect on the world that is only fully recognized in retrospect. For example, the 2008 global financial crisis affected us all, but was only fully understood by the general public after Hollywood films such as The Big Short and Margin Call gave the crisis full coverage and were able to retell the story in easy-to-understand terms.
Cryptocurrency was intended by its developers as a liberating technology: freedom from both central and private banks, freedom from intrusive questioning by retailers who no longer carried payment risk, and freedom from censorship by payment processors and their political overseers.
The President’s vote last week to veto Staff Accounting Bulletin 121, or SAB 121, a congressional resolution dealing with the accounting recommendations of the Securities and Exchange Commission, is equally puzzling and potentially significant – not because it will lead to a financial crisis (it won’t), but because it could put Donald Trump in the White House.
SAB 121 is the agency’s interpretive guidance that simply provides that banks that file regulatory filings with the SEC who choose to “custody” crypto assets like Bitcoin or Ethereum on behalf of third parties must list those assets as liabilities on their balance sheets. Moreover, this liability must be updated periodically to reflect increases and decreases in the value of the assets under the bank’s custody. As the value of the assets increases, so does the corresponding liability.
The state of bank balance sheets has been a top concern for federal regulators since the 2008 crisis. To be clear, that crisis occurred because banks bundled together junk assets, such as bonds backed by subprime mortgages, and carried them on their books at 100% of their face value, even though in reality those assets were worth much less.
Banks are doing exactly the same thing today. Unrealized losses on low interest rate loans Bitcoin prices began to rise as the Federal Reserve raised interest rates to combat inflation, but rather than addressing that problem, President Biden and the SEC decided that Bitcoin was the problem and embarked on a multiyear campaign of enforcement to rein in the U.S. Bitcoin industry.
Hold on, you say. Surely cryptocurrencies should be subject to the same accounting rules as other assets on a bank’s balance sheet, right? Sure. But banks don’t typically buy or sell cryptocurrencies. On the balance sheet. Banks make money on loans and purchases, and since cryptocurrencies do not earn interest, banks do not make money by holding cryptocurrencies, but by charging a fixed fee (say 50 basis points per year) to safeguard them for third parties.So, the expected accounting treatment of banks’ holdings of cryptocurrencies is not Treasury bills or RMBS that the bank owns, but more like a gold watch inherited from Uncle Bob sitting in a savings box that the bank keeps. do not have Own.
There is an economic difference, since balance sheet liabilities are costly to banks, while deposit liabilities are not. For balance sheet issues, banks must hold so-called “regulatory capital”, i.e. highly liquid securities such as Treasury bills and cash, to be able to repay the financial institution’s liabilities as they come due. The larger the assets, or the worse the bank’s balance sheet, the more cash the bank must hold to continue operating. Since banks make money by lending out their cash, the more cash they have to hold, the higher their cost of capital and the less profit they make. Deposit liabilities are handled differently, presumably because the assets are always available to meet demand. Financial institutions can completely separate customer assets from trading operations, for example by holding the assets in bankruptcy-remote form, ensuring that losses of crypto assets due to external events such as natural disasters or software failures do not affect the rest of the bank.
Returning to the example of Uncle Bob’s gold watch stored in a safe deposit box, if SAB 121 applied to the watch, the bank would not only be required to store the watch, but would also be required to retain the cash value of the watch, periodically revalue the watch to its current value, and store it, cash, unused, in a bank account in the bank’s name. Treating (off-balance sheet) cryptocurrencies like (on-balance sheet) securities in this way would make the cost of storing cryptocurrencies prohibitive for any bank.
Against this backdrop, President Biden vetoed a formal disapproval resolution passed by Congress on a bipartisan basis, including a 60-40 majority in the Senate, that would have allowed banks to treat cryptocurrency custody agreements as deposit obligations, just like all other custody agreements. The passage of the bill was what appeared to be a knee-jerk reaction by Congress after a public opinion poll released in early May indicated that cryptocurrency custody agreements should be treated as deposit obligations, just like all other custody agreements. Up to 20% of voters Cryptocurrency is seen as a key election issue in battleground states.
If cryptocurrency is on the agenda this term, it’s for one reason and one reason only: Donald Trump made it so. The chain of events leading up to the veto of SAB 121 makes it clear that the Trump campaign’s efforts on this issue have been deliberate, gradual and deliberate. After some intense back-office back-and-forth back-and-forth back-and-forth with the industry in early February, the 45th President spoke favorably of Bitcoin for the first time during a town hall-style forum. On Fox News Later that month, after receiving no negative response, the campaign again refrained from mentioning him on March 10 when he suggested allowing people to pay to enter. Collectible sneakers available for purchase with Bitcoin In an interview with CNBC.
These early signals went unchallenged on the campaign trail and were rightly viewed by the industry as peace offers. Then, at the Libertarian National Convention on May 25, Trump boldly announced to cheers: A wide range of policy programs To protect the cryptocurrency industry, the company promised to commute the prison sentence of early Bitcoin user Ross Ulbricht from two life plus 45 years to the time served. To say the industry received the proposal favorably would be an understatement.
Cryptocurrency was intended by its developers as a liberating technology: liberation from both central and private banks; liberation from intrusive questioning by retailers who no longer carry payment risk; liberation from censorship by payment processors and their political overseers. It is perhaps not surprising that a technology that shows such respect for its users should also earn the loyalty of those users. It is refreshing to see that most of our elected politicians, especially the younger ones, get the memo.
It remains to be seen whether this new tech interest group can take control of American elections. The increased cryptocurrency activity in Washington DC over the past 30 days suggests that it can. If so, politics of the near future could look very different than politics of the past.
