The US Senate Overturning The SEC’s SAB 121: Implications For Retail And Institutional Investors

Key Takeaways

  • With the US Senate overturning the SEC’s Staff Accounting Bulleting 121, the securities regulator may be forced to renew its approach in terms of how it views and handles digital assets.
  • The removal of the crypto rule is both positive and negative. Without proper guidance, investors are open to more fraud. However, by overturning SAB 121, regulators must take a common-sense approach to giving crypto businesses and projects more guidance on compliance.
  • The US Senate’s decision, coupled with the innovative tools developed by crypto-projects, brings financial inclusion within reach for unbanked and underbanked populations.

The US Senate recently voted to overturn the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 rule, aimed at regulating cryptocurrencies. This decision marks a new approach in the regulatory landscape of the crypto market, with profound implications for both retail and institutional investors.

In this article, let’s explore how this change impacts different stakeholders and provide real-world examples to illustrate the consequences for US citizens.

Background Of SAB 121

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Issued in March 2022 by the Securities and Exchange Commission (SEC), Staff Accounting Bulletin (SAB) 121 focuses on accounting for a company’s responsibility to safeguard crypto assets held on behalf of its users.

The rise of cryptocurrencies led to new business models where platforms transact and safeguard crypto assets for their clients. However, the SAB 121 rule would subject them to stringent regulatory requirements, including registration and reporting mandates. The rule was intended to protect investors from fraud and market manipulation, but it also faced criticism for potentially stifling innovation and imposing excessive burdens on smaller crypto projects.

The Senate’s decision to overturn the SEC’s crypto rule reflects a broader debate about the balance between regulation and innovation. Proponents of the overturn argue that the SEC’s approach was too restrictive and hindered the growth of a promising industry. Opponents, however, warn that the lack of regulation could leave investors vulnerable to fraud and market volatility.

Impact On Retail Investors

Retail investors are individuals who invest their own money, often in smaller amounts, compared to institutional investors. The Senate’s decision to overturn the SEC’s rule has both positive and negative implications for this group:

Positive Impacts

  1. Increased Access To The Crypto Markets – With fewer regulatory hurdles, more crypto projects can emerge, providing retail investors with a wider array of investment opportunities. This democratization of access could lead to higher participation rates and potentially greater returns for those willing to take on the associated risks.
  1. Innovation And Growth – The overturn is likely to encourage innovation within the crypto space. Entrepreneurs and developers may be more inclined to launch new projects, leading to advancements in blockchain technology and decentralized finance (DeFi). Retail investors could also benefit from these technological advancements through new investment products and services.

Negative Impacts

  1. Higher Risks Of Fraud And Scams – Without stringent SEC oversight, there is an increased risk of fraudulent schemes and scams targeting retail investors. The crypto market has a history of high-profile fraud cases, and the lack of regulation could exacerbate this issue, putting inexperienced investors at significant risk.
  1. Market Volatility – The absence of regulatory safeguards may contribute to even greater market instability, which could be detrimental to retail investors who are not well-versed in managing such risks.

Impact On Institutional Investors

Institutional investors, such as hedge funds, mutual funds, and pension funds, manage large sums of money and have more resources and expertise than retail investors, and the Senate’s decision might affect them in different ways:

Positive Impacts

  1. Broader Investment Opportunities – Institutional investors will benefit from the expanded range of investable assets in the crypto market as it allows them to create multiple portfolios and potentially achieve higher returns. Institutions are often able to conduct thorough due diligence, mitigating some of the risks associated with less regulation.
  1. Enhanced Market Participation – The decision could lead to increased participation by institutional investors in the crypto market. Greater involvement by these entities can provide additional liquidity and stability to the market, which could benefit all participants, including retail investors.

Negative Impacts

  1. Regulatory Uncertainty – Institutional investors thrive on predictability and regulatory clarity. The SEC’s rule overturning creates uncertainty about the future regulatory environment. Institutions may be cautious about committing large sums to the crypto market until clearer guidelines are established.
  1. Reputation Risk – Institutions are concerned with maintaining their reputation and managing fiduciary responsibilities. Investing in a market perceived as the “Wild West” could pose reputational risks if it is associated with fraud or significant losses.

Final Thoughts

In recent weeks, President Joe Biden vetoed the bill that would allow financial institutions to custody Bitcoin for its customers. This move was seen as devastating because the US Government is essentially treating banks who are handling crypto assets as liabilities on their balance sheets. This is one of the the primary reasons why this veto is controversial as it is setting back Wall Street multiple steps behind, and it is going to challenge every American voter to take a stand, especially with the US elections coming up.

As the crypto market continues to evolve, the balance between encouraging innovation and ensuring investor protection will remain a critical issue. Policymakers, investors, and industry participants must collaborate to create frameworks that support growth whilst safeguarding the interests of all participants.


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