With the U.S. presidential election less than two weeks away, we would like to reflect on recent U.S. regulatory developments for digital assets, and how they could be an indicator for 2025. Regardless of who is elected president, we are optimistic that 2025 will provide more regulatory clarity for digital assets.
Congressional Repeal of SAB 121
Reaching a Congressional consensus on a regulatory approach for digital assets has been a challenge. Some Congressional members were proponents of a regulatory framework, while others believed none was needed. Any Congressional action required bipartisan approval. No single party had sufficient votes to pass legislation alone.
In early May 2024, the Senate and the House of Representatives unexpectedly took bipartisan action to repeal the Security and Exchange Commission (SEC) Staff Account Bulletin 121 (“SAB 121”). SAB 121 required financial institutions to categorize digital assets as a liability on their balance sheets, imposing complex disclosures and a corresponding holding of assets. This effectively made it impractical for financial institutions to custody digital assets. Not surprisingly, no financial institutions entered the custody market, despite decades of experience custodying billions of dollars worth of customers’ assets. This meant less competition and thus less choice for customers.
The repeal of SAB 121 marked a necessary and desired change. Unfortunately, the U.S. president vetoed this repeal, and SAB 121 remains in force. Nonetheless, this Congressional action was a promising step in the right direction.
House of Representatives Passage of FIT21
In late May 2024, the House of Representatives overwhelmingly passed the Financial Innovation and Technology for the 21st Century Act (“FIT21”). It was an unprecedented action by the House to pass a comprehensive digital asset regulatory framework. Members from both political parties enacted this bipartisan bill.
FIT21 clarified the responsibilities and oversight of the SEC and the Commodity Futures Trading Commission (CFTC). It defined when a digital asset was a commodity and when it was a security. It provided certain exemptions from registration under the Securities Act of 1933, rules for sales in secondary markets, and new regulations for digital assets intermediaries. This would effectively repeal SAB 121, paving the way for financial institutions to custody digital assets.
FIT21 is currently with the Senate. The Senate has not yet acted on it, but that doesn’t indicate a lack of interest. The Senate is likely delaying its review until after the presidential election, when the new administration takes office.
2025 Outlook
In contrast to the 2020 presidential election, digital assets have become a primary issue for this year’s candidates. SAB 121 and FIT21 reflect Congress’ increasing interest. Moreover, perhaps due to recognizing the negative impact of SAB 121, last month the SEC provided the Bank of New York an exemption to SAB 121. It is widely expected that other financial institutions will seek and receive similar exemptions, effectively repealing SAB 121. This adds further evidence of a changing regulatory climate.
2025 signals to be a year when we may finally see a regulatory framework for digital assets. It is likely the Senate will pass a version of FIT21, and, with strong bipartisan support, the president will approve it. This will bring the U.S. to the fore in leading the next wave of innovation, while thoughtfully balancing consumer risk.
