The Ghosts of Glass-Steagall: SAB 122 and History’s Warning for Bitcoin’s Future

As a Bitcoiner and CEO of Orange Horizon Wealth, my first reaction to the repeal of SAB 121 on January 23rd was likely the same as other Bitcoiners: “This is bullish for Bitcoin.”  

But as a risk manager with 25 years of experience, another thought crept into my mind, “The financial industry was also enthusiastic about the repeal of Glass-Steagall in 1999. And that set the stage for the 2008 financial crisis.”

While SAB 121’s repeal paves the way for institutional Bitcoin adoption, it also removes a layer of transparency—one that was meant to prevent reckless banking behavior. Other than this phenomenal article from Preston Pysh, I don’t believe the risks of the SAB 121 repeal are being discussed enough.

My goal in examining the similarities between the repeal of Glass-Steagall in 1999 and SAB 121 in 2025 is to help create dialogue in the Bitcoin industry so we can avoid the mistakes from the Great Financial Crisis.

What is the Glass-Steagall Act?

The Glass-Steagall Act of 1933 was a legislative order that separated commercial banking (holding consumer deposits) from investment banking (speculative trading). This firewall prevented banks from gambling with customer deposits protected by federal insurance. It remained in place for over 60 years—until Congress dismantled it in 1999.

In 1999, Congress passed the Gramm-Leach-Bliley Act, repealing Glass-Steagall’s core provisions. Banks could now combine traditional deposit-taking with riskier market-making and trading activities. 

Almost immediately after the legal barrier between deposit-taking banks and risk-taking investment banks was removed, the big banks started buying up the small ones, setting the stage for the great financial crisis.

What Happened After Glass-Steagall Repeal? 

After Glass-Steagall’s repeal, bank mergers skyrocketed. By 2010, the top 10 firms controlled nearly 50% of U.S. banking assets, up from 36% in 2000. These larger banks dove into high-risk securities businesses like mortgage-backed securities (MBS), turning them into a massive profit engine.

Between 1996 and 2007, the MBS market nearly tripled to $7.3 trillion, while subprime mortgages—high-risk loans—grew from 54% to 75% of new issuances. Bigger markets meant bigger risks.

When housing prices crashed in 2008, defaults surged, and “too big to fail” banks imploded.

The mechanics of this happening are probably best captured in the Jenga scene from The Big Short.

Unrelated note: Larry Fink, the pioneer in bringing Bitcoin to institutions through ETFs like IBIT, also pioneered mortgage-backed securities at First Boston in 1978. Something to consider.

What if Bitcoin Crashed Like Houses In 2008?

In 2008, the collapse of Lehman Brothers triggered a chain reaction of bank failures and massive bailouts—$476 billion for Citibank, $336 billion for Bank of America, and $135 billion for Morgan Stanley.

What if Bitcoin became the next high-risk asset banks gamble with? The opportunity is similar to what mortgage-backed securities offered in the early 2000s—huge profits if things go well, and large losses, resulting from not fully understanding the product they are packaging and selling, potentially having second and third-order effects. 

Let’s look at the upside.

Bitcoin has been the best-performing asset in 11 of the last 14 years. 

The ability to collateralize and productize a high-return asset like Bitcoin can lead to new growth.

Just look at BlackRock with IBIT. It is widely considered the fastest-growing and best-performing ETF launch in Wall Street history.

With the repeal of SAB 121, you can believe that other Wall Street firms beyond the ETF issuers are looking to cash in on Bitcoin.

Now, let’s look at the downside.

If the system were to enter a crisis as in 2008, and Bitcoin was deeply intertwined, consumers who have their Bitcoin managed inside that system, are likely not getting it back. You cannot print more Bitcoin. There will only ever be 21 million. Bitcoin has no central bank, government issuer, or lender of last resort, so no one can magically create more of it to bail out a failed institution. 

They may be able to create dollars to attempt a bailout, but at that point, in the midst of another dollar-denominated collapse, what will the price of Bitcoin be? How much Bitcoin will you be able to buy with those dollars?

The scarcity that makes Bitcoin valuable also makes it unforgiving of fractional reserve games.

If a bank loses or mismanages customer Bitcoin (say, lends it out and can’t get it back), they can’t rely on the Federal Reserve to print a bit more Bitcoin to fill the hole. 

Pysh’s nightmare scenario is scary: “If banks mismanage Bitcoin through fractional reserves, a crypto market crash or a loss of confidence could trigger a liquidity crisis that dwarfs anything we saw with the fall of FTX.”

In a crisis, would the government feel pressured to backstop those losses to protect depositors or the financial system? In 2008, the answer was yes for traditional assets. But will it be the same for Bitcoin? Would they use it as an excuse to blame Bitcoin and set our industry back?

The Similarities Of SAB 121 & Glass-Steagall

SAB 121 required banks to account for Bitcoin as both an asset and a liability, effectively ensuring full-reserve banking — a foreign concept in today’s banking environment. This provided transparency in custody and prevented risky practices like rehypothecation—where banks lend out Bitcoin they don’t actually have. 

If a bank held $100 million of Bitcoin in custody (a liability for the bank as it has to provide that Bitcoin to the client upon demand), it would have to show a corresponding $100 million in cash or equivalent as an asset on its balance sheet in order to meet that demand. 

This requirement reflected a misunderstanding of Bitcoin — that it is money, and as long as they didn’t rehypothecate, Bitcoin fully reserves itself (in Bitcoin terms, 1 BTC = 1 BTC, after all). SAB 121 actually implemented a 2x full-reserve requirement (in USD terms). 

Earlier this year, under new leadership, the SEC issued SAB No. 122, which rescinded SAB 121, removing the requirement of banks to hold assets on the balance sheet corresponding to the amount of Bitcoin held. 

This reversal came right after the U.S. administration and SEC leadership changed, signaling a new regulatory philosophy toward crypto. 

With SAB 121 repealed, banks can custody digital assets more like they do custody of traditional securities or cash without having to fully reserve those liabilities. 

Some Bitcoiners like Eric Weiss have said, “The imminent repeal of SAB 121 is the single biggest catalyst for price appreciation in crypto and Bitcoin.” 

https://x.com/Eric_BIGfund/status/1882054476174966970 

I don’t disagree that it’s a major catalyst for price appreciation. 

This allows big banks to handle Bitcoin and other crypto at scale by integrating them into their traditional banking services. 

The flip side is this: a protective barrier—however imperfect—has been removed. 

This invites banks to engage in the kinds of behavior we’ve seen for 100 years with a fractional reserve system.

As the saying goes, “Those who cannot remember the past are condemned to repeat it.”

Navigating the Road Ahead Using Caution and History as Our Guide

As a Bitcoiner, I’m excited to see the Overton window shift.

In theory, the track record of large institutions offering Bitcoin-based services will improve the perception of credibility of this young industry. 

If managed prudently and correctly, banks could help provide stability and security to Bitcoin holders who don’t want to self-custody their coins.

But, history has shown that when regulatory guardrails come off, risk tends to rush in.

Here are a few thoughtful suggestions to help us steer clear of the pitfalls we encountered in 2008 regarding Bitcoin: 

For Bitcoiners 

Just because a big bank is holding your Bitcoin does not mean there aren’t risks.

We need to ask the hard questions of our congressmen and our banks:

• Will my Bitcoin be lent out or reused in other transactions? 

• Is the bank genuinely holding one-for-one reserves? 

• What could happen if the price drops significantly or if everyone wants to withdraw their coins simultaneously? 

 For Banks 

Transparency wins.

The saying “Don’t Trust. Verify.” resonates strongly with the Bitcoin community. 

Because Bitcoin is readily verifiable, banks might consider sharing the addresses where client funds are held, like Bitwise or El Salvador have done, proving they are holding the Bitcoin they claim to have.

Doing this may create the trust and transparency Bitcoiners expect and could be a major driver in attracting assets to your firm.

For Regulators 

The U.S. government should consider setting global standards and establishing clear guidelines regarding Bitcoin custody. Clear frameworks will help the industry avoid mismanaging consumer funds through rehypothecation and fractional reserve banking. 

The story of 2008 isn’t ancient history—it is still fresh in the minds of someone like me who managed other people’s money at the time.

Without proper controls, asset managers will be reluctant to recommend these institutions as viable partners for their clients to store their assets.

Bitcoin Can Transform Our Financial System

Bitcoin’s role in the modern financial system has the potential to be transformative—but only if we avoid repeating past mistakes.

The repeal of SAB 121 removes a layer of transparency and restraint, inviting banks to engage in risky practices that have historically led to financial crises.

In 2008, reckless leverage and opaque lending practices turned a housing boom into a systemic collapse. If banks apply the same fractional reserve games to Bitcoin, the fallout could be even worse—because, unlike fiat, Bitcoin cannot be printed to bail them out.

The ghosts of Glass-Steagall are watching. Will we learn from history? Will banks change their behavior? Or will they begin lending out Bitcoin that they don’t have for the sake of profit? 

Bitcoiners, banks, and regulators each have a role to play. 

Hopefully, this time, we will get it right.