Thursday, May 9, 2024

the ludicrous SAB 121 standoff, central bank business models, currency diversification and trade, crypto volumes

“True knowledge is knowledge of why things are as they are, and not merely what they are.” – Isaiah Berlin  ||  

Hello all! I hope you’re doing well!

I know I owe you all an explanation for what’s going on with the audio: I have to suspend the dailies for now. Sorry about that. For the past couple of weeks, it’s been because I haven’t had access to my recording equipment until mid-day. Going forward, it’s because I’ve embarked on a new personal and professional project, which I will be able to tell you about probably next week (I’m excited, and no, it won’t impact the publishing of this newsletter other than give me a strict but welcome publishing deadline of 8:30amET.) Again, apologies, and I do really hope this won’t make you want to stop being a subscriber! I value you! ❤

IN THIS NEWSLETTER:

• Swords drawn: SAB 121 moves through Congress

• The central bank business model

• Currency diversification in trade

• Crypto volumes via Robinhood and Coinbase

If you’re not a subscriber to the premium daily, I hope you’ll consider becoming one! You’ll get ~daily insight into the growing overlap between the crypto and macro landscapes, as well as some useful links. And there’s a free trial!

WHAT I’M WATCHING:

Swords drawn: SAB 121 moves through Congress

Yesterday, the US House of Representatives voted in favour of a bill to repeal SAB 121, the SEC’s guidance that effectively blocks banks from offering crypto custody.

Also yesterday, the White House said it would veto the bill.

This is more than nuts, it is alarming, and shows just how narrow and yet controlling the US government wants to become. I mean, we knew this, but the discarding of any pretence otherwise is a sign of either overconfidence or desperation, neither of which are good.

In case you haven’t been following the conflict, I wrote about it in more detail here (Feb 7), but in brief:

In April of last year, the SEC published Staff Accounting Bulletin (SAB) 121, which stipulated that all listed banks had to record the dollar amount of crypto assets held in custody on their balance sheets as liabilities, offsetting this with a corresponding capital provision. This makes it prohibitively expensive for banks to offer crypto custody services.

The objections are many, and range from the technical to the conceptual and even the legal – here are just a few:

1) Assets held in custody are generally not held on the balance sheet, which makes sense since they do not belong to the custodian. Custody is a service and does not imply investment in or ownership of the assets.

2) No other asset class gets this treatment.

3) SAB 121 means that crypto custody services can only be offered by entities without the same degree of oversight and regulation, begging the question as to just who is being protected here.

4) The SEC drew up the bulletin without consulting bank regulators, even though it has a material impact on bank business operations.

5) SEC Chair Gary Gensler has insisted that SAB 121 is just a “guideline”, but it specifies a deadline for compliance which suggests the intent to enforce.

6) SAB 121 is in conflict with crypto custody guidance from Basel (which sets global regulatory standards for banks) and the Office of the Comptroller of the Currency (the US bank regulator).

7) In October of last year, the Government Accountability Office (GAO) ruled that the SEC did not follow proper procedure in implementing this measure, and that it should be considered not a guideline but a “rule” under the Congressional Review Act (CRA). This requires a detailed cost/benefit analysis and a period for public comment before submission to Congress, which has the option of rejecting the rule.

The repeal-SAB 121 bill passed yesterday, 228-182, with almost all Republicans and 21 Democrats voting in favour, an encouragingly high number given the widening partisan divide in Congress.

And this was after the White House sent out a relatively threatening memo promising a veto.