Make the Rehypothecation of Bitcoin Custody Illegal - Preston Pysh
In a significant regulatory shift in the United States, the SEC has repealed the controversial Staff Accounting Bulletin No. 121 (SAB 121), allowing traditional banks to custody cryptocurrency similarly to cash and other assets. However, this change comes with increased responsibilities that many institutions may not be prepared to handle, warns Preston Pysh in a blog post.
"Bitcoin is different - VERY different. It has no issuer, no central authority, and no capacity for anyone to mint additional coins in the event of a crisis. This non-negotiable scarcity is part of what makes Bitcoin so compelling and transformative -- but it also places the digital asset at the risk of massive disruption when traditional financial institutions attempt to apply their usual business models of fractional reserves, under-collateralized lending, and, most concerning of all, rehypothecation."
Rehypothecation is the practice of financial institutions reusing clients' collateral, like bitcoin, for their own trading -- has repeatedly resulted in disaster in the crypto space. High-profile failures such as FTX, BlockFi, and Genesis highlight that under-collateralized, fractional-reserve practices can lead to significant losses for depositors and investors.
"The repeal of SAB 121, while motivated by a desire to stimulate innovation and reduce regulatory overreach, could give Too Big To Fail (TBTF) banks the green light to replicate these same practices -- only at a far larger scale. Such a crisis could ripple through financial markets, and ultimately harm millions of people who have outsourced their trust to institutions who have 'gambled' away their savings," said Pysh.
It is "paramount that all financial institutions and custodians be expressly forbidden from rehypothecating customer-held BTC," the blog reads, adding that such measures would safeguard both retail and institutional investors alike, "ensuring no entity can secretly repurpose or over-leverage Bitcoin positions at the expense of depositors."
US Congress must enact a ban on the rehypothecation of bitcoin for all institutions, from small lenders to major banks. The SEC should also implement protective measures to prevent banks, brokers, and exchanges from commingling or reusing customer bitcoin for their own profit, states the call for action.