SEC Crypto Accounting Rule Overturned?

A step condemning a rule on how to account for cryptocurrency assets has been passed by both houses of the U.S. Congress – leading to a likely veto by the White House.

Why does this matter? The crypto industry had started its fight against chairman Gary Gensler in the courts, but has managed to successfully extend it into a new field: a legislature.

In a 60-38 vote in the Senate, legislation taking down the Securities and Exchange Commission’s (SEC) staff accounting bulletin 121 – which makes it very expensive for financial institutions to take part of the crypto custody business – has passed.

Issued by the agency in 2022, SAB 121 believes that a company keeping a customer’s cryptocurrencies should record them on its own balance sheet – a thing that could have major capital implications for banks working with crypto clients.

Sen. Cynthia Lummis – who had initially pushed for the resolution in the Senate – stated that the bulletin was “a disaster” and did not protect consumers. Lummis is well-known to be a vocal advocate for Bitcoin.

"This is a win for financial innovation and a clear rebuke of the way the Biden administration and Chair Gary Gensler have treated crypto assets and marks the first time both chambers of Congress have passed standalone crypto legislation," she said in a statement.

 

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Nonetheless, Sen. Elizabeth Warren urged the Senate to align with Biden by voting no, claiming that this is an entirely different asset class than what banks and other regulated financial institutions are used to. She emphasised that digital assets are not something physical that banks could hold in a vault and is completely online, which poses the risk of hacks.

For context, the SEC has been feeling increasingly confident after quite a few wins against its case against Coinbase, the country’s largest cryptocurrency exchange, as well as Terraform Labs.

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However, the larger picture tells otherwise.

The SEC had also suffered a string of major losses, such as on the characterisation of the cryptocurrency XRP and approval of a spot bitcoin ETFs.

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Lawmakers went to the extent of bashing the SEC for proposing a policy without even going through the necessary rule process, and the Government Accountability Office agreed.

"SAB 121 is non-binding staff guidance that, if followed, enhances important disclosure to investors in firms that safeguard crypto assets for others," an SEC spokesperson said in a statement after the vote. "Time and again, we have seen crypto firms fail and watched as their customers lined up at the bankruptcy court in hopes of getting what they thought was legally theirs."

Being the biggest trusted regulatory body, the SEC’s mission should be focusing on protecting investors. However, SAB 121 implies the total opposite by preventing highly regulated American banks from placing digital assets in their custody at scale.

Pressure to Repeal

It is important to note that the White House has indicated that it would veto any attempt to overturn SAB 121.

As expected, Gensler seems unwilling to scrap SAB 121.

He believes that such law addresses risks SEC staff see in crypto markets – which has been reinforced by the huge losses caused by failures of crypto businesses such as FTX.

However, Gensler remains under pressure to overturn it, or at least allow the public opinion to weigh in on it.

Now despite the Senate’s approval, the future remains uncertain due to the threat of a presidential veto. If Biden were to follow through on his promise to veto, the resolution’s progress will be halted, maintaining the status quo regarding the custody of digital assets by financial institutions.

Biden is now left with three options: either sign the bill into law, veto it, or just do… nothing. If the latter happens, then the bill goes into law without his signature.