Wednesday, Feb 7, 2024

the SAB 121 saga and why it's looking hopeful, China could be getting serious on market support

“Change begets change. Nothing propagates so fast.” – Charles Dickens, in ‘The Life and Adventures of Martin Chuzzlewit’ ||

Hello everyone! For all you literary nerds out there, today is Charles Dickens’ birthday. He would be 212 years old. This has nothing to do with anything I talk about below, but I think it’s amazing to think how little human character has changed over the past two hundred years, even though technology has reshaped our habits.

You’re reading the daily premium Crypto is Macro Now newsletter, where I look at the growing overlap between the crypto and macro landscapes. There’s also usually some market commentary, but I don’t give trading ideas, and NOTHING I say is investment advice. For full disclosure, I have held the same long positions in BTC and ETH for years, and have no intention to either buy more or sell in the near future.

For all of you who indicated you’d be interested in a voice recording of what I write, **I did it!** I think I managed to record the newsletter, and embed the audio file below (it’s tucked in the middle). It should work. I hope. Although there’s quite a long silence when it starts, have to figure out how to remove that. I’m getting better at this, but it’s still taking up some time which is why this newsletter is a bit late today. So do let me know, please, if you find it useful - else I’ll go back to focusing on getting this out earlier. 😝

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Note: I’m speaking at BlockWorks’ upcoming Digital Asset Summit conference in London on March 18-20. Normally I say no to conferences, but this is one of the very few worth travelling for. If you’re thinking of going, it’d be great to say hi, and here’s a discount code you can use: CIMN10.

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IN THIS NEWSLETTER

• The crypto bill that is likely to pass and could make a big short-term difference

• China works on holiday relief

WHAT I’M WATCHING

The crypto bill that is likely to pass and could make a big short-term difference

Normally, I don’t get excited about crypto-related bills crawling their way through the halls of power, because so few of them go anywhere. Today I’m going to make an exception.

Last week, Representatives Wiley Nickel (D-NC) and Mike Flood (R-NE) together with Senator Cynthia Lummis (R-WY) presented a joint resolution asking for official congressional disapproval of a bulletin issued in April 2022 by the US Securities and Exchange Commission (SEC). The representatives and senator also presented a bill, the “Uniform Treatment of Custodial Assets Act”, that aims to prevent federal agencies from insisting that any assets in custody require a capital offset beyond those established by banking regulators.

I bring it up because this bill has a good chance of being successful, perhaps even before the end of the current Administration. If so, it would be a very big deal for the crypto ecosystem, on many fronts. This is one worth watching and worth rooting for.

Some background:

In April 2022, 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.

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.

The SEC move put the lid on plans by large, regulated institutions such as BNY Mellon, State Street (two of the largest custodians in the world) and others to offer crypto custody services to their clients. It’s not just the big hit to capital efficiency, which matters to banks. The bulletin effectively made the business line unprofitable, since the foregone income on tied-up capital would not be offset by custody fees at current market rates.

You might have noticed that none of the custodians for the BTC spot ETFs are regulated banks – this is why. None of them as yet offer the service, although several have in the past expressed interest in doing so.

What’s more, SEC Chair Gensler himself admitted that this bulletin was drawn up without consulting bank regulators. His defence was that the SAB explicitly says that the measures “are not rules or interpretations of the Commission, nor are they published as bearing the Commission’s official approval” – but the document went ahead and gave a deadline for compliance (pretty much right away). This implied the intention to enforce… even though the measures are not rules or even interpretations. Confused?