As a financial regulatory lawyer, your correspondent can confidently tell you that financial regulation is one of the most boring topics on Earth. Some aspects of the field, such as regulatory capital requirements, are incredibly dull, usually the exclusive preserve of lawyers who not only are nerds but can be identified as nerds without visual aids from several hundred yards away.

Very occasionally, though, financial regulation touches the rest of the world in profound ways that are only fully recognizable in hindsight. The 2008 global financial crisis, for example, affected us all but was only completely understood by the man on the street after Hollywood takes like "The Big Short" or "Margin Call" processed the crisis in its entirety and could retell the story in easy-to-understand terms.

Crypto was intended by its creators as liberation technology: liberation from banks, both central and private; liberation from intrusive questions by retailers who no longer have settlement risk; liberation from censorship by payment processors and their political overseers.

Last week’s presidential veto of a congressional resolution dealing with a U.S. Securities and Exchange Commission accounting recommendation, titled “Staff Accounting Bulletin 121” or “SAB 121,” is similarly arcane and may prove equally consequential. Not because it will lead to a financial crisis (it won’t) but because it may put Donald Trump in the White House.

SAB 121 is agency interpretive guidance that states, in brief, that banks that make regulatory filings with the SEC, if they choose to “custody” crypto assets like Bitcoin or Ether on behalf of third parties, must show those assets as a liability on their balance sheets. Moreover, this liability should be periodically updated to reflect the increase or decrease in value of the asset(s) under that bank’s control. As the asset's value increases, so does the corresponding liability.

The condition of bank balance sheets has been a primary concern of federal regulators ever since the crisis of 2008. By way of reminder, that crisis was caused because banks bundled trash assets like bonds backed by subprime real estate loans and held them on their books marked to 100% of their face value even though those assets were, in reality, worth considerably less.

Banks are doing the exact same thing today regarding unrealized losses on low-interest loans that started to rack up as the Fed jacked rates to fight inflation. Rather than dealing with that problem, though, President Biden and the SEC think that Bitcoin is the problem and have embarked on a multiyear regulation-by-enforcement campaign to suppress the industry in the United States.

Hold on, I hear you say; indeed it’s reasonable that crypto should follow the same accounting rules as any other asset on a bank’s balance sheet, right? Sure. However, banks do not ordinarily buy and sell crypto on a balance sheet. Because banks make money by making and purchasing loans, and crypto does not throw off interest, banks will not make money by holding crypto themselves but by charging a fixed fee — say, 50 basis points per year — to safeguard it for third parties. As such, the way you’d expect crypto to be treated for accounting purposes as the bank holds it is less like a T-Bill or an RMBS note that the bank itself owns and more like the gold watch you inherited from your Uncle Bob, which sits in a deposit box, which the bank does not own.

There is an economic difference because balance sheet liabilities are expensive for banks and deposit liabilities are not. For balance sheet problems, banks must hold so-called “regulatory capital,” highly liquid securities like U.S. Treasuries or cash, and keep it available to frank the institution’s liabilities if they should ever fall due. The higher the asset or the worse the bank’s balance sheet, the more cash the bank needs to hold back to continue operating; since banks make money by lending cash out, the more cash they need to hold back, the higher their cost of capital becomes and the less money they make. Deposit liabilities are handled differently, presumably because the assets are always available to satisfy the demand. The institution can fully segregate client assets from its trading operations by, for example, holding the assets in an insolvency-remote fashion so the loss of the crypto assets due to some external event like an act of God or some software fault will not affect the rest of the bank.

Returning to the example of the gold watch from your Uncle Bob in a safe deposit box, if SAB 121 applied to the watch, the bank would not only have to hold onto the watch; it would also have to keep the cash value of the watch and periodically re-mark the watch to market, in cash, idle and unused in a bank account under its name. Treating (off-balance sheet) crypto like (on-balance sheet) securities in this fashion makes the cost of holding crypto prohibitive for any bank.

It is against that background that President Biden vetoed a formal Resolution of Disapproval passed through Congress on a meaningfully bipartisan basis, including 60-40 in the U.S. Senate, which would have permitted banks to treat custody arrangements in crypto like custody arrangements for everything else: as a deposit liability, as it should be. The passage of that bill, in turn, was a seemingly knee-jerk reaction by our legislature after a poll was released in early May showing that up to 20% of voters in swing states considered crypto a key election issue.

If crypto is an issue this cycle, it is for one reason and one alone: because Donald Trump made it so. If we look at the sequence of events that led up to the SAB 121 veto, it is clear that the Trump campaign’s involvement here was cautious, incremental, and deliberate. After a flurry of back-office engagement with the industry in early February, the 45th president mentioned Bitcoin favorably for the first time in a town-hall-style forum on Fox News later that month. After receiving no negative blowback, the campaign dropped another mention on March 10 when he suggested allowing people to pay for collectible sneakers with Bitcoin in an interview with CNBC.

These early signals passed without incident for the campaign and were regarded, correctly, as olive branches by the industry. Then, at the Libertarian National Convention on May 25, Trump boldly announced, to cheers, a wide-ranging policy program to protect the crypto industry, including a promise to commute early Bitcoin user Ross Ulbricht’s prison sentence from 2x life plus 45 years to time served. To say that the sector received this proposal well would be an understatement.

Crypto was intended by its creators as liberation technology: liberation from banks, both central and private; liberation from intrusive questions by retailers who no longer have settlement risk; liberation from censorship by payment processors and their political overseers. It is perhaps unsurprising that a technology exhibiting such respect for its users should command those users’ loyalty; it is refreshing to see that most of our elected politicians, skewing younger, are getting that memo.

What remains to be seen is whether this new technological interest group can serve as a kingmaker in an American election. The flurry of crypto activity in the last 30 days in D.C. suggests it can. If so, the politics of the near future promise to be very different from the politics of our recent past.