SEC Grants Exemptions to Select Firms from Crypto Accounting Bulletin

“...that is available to any entity that would want to be providing crypto asset safeguarding services."

Key Takeaways

• Since the SEC released SAB 121 in March 2020, companies have been seeking guidance on how to approach the new policies.
 

• Businesses have developed specific processes to return cryptocurrencies to customers in bankruptcy cases.
 

• Without confirming, the source said the potential exemption is available to any entity wanting to provide crypto asset safeguarding services.

A source close to the U.S. SEC has revealed that some companies have proposed business solutions that would allow them to avoid the contentious crypto accounting standards. This exemption is available to those who can prove they have proper measures to recover cryptocurrency in bankruptcy proceedings, especially given the many similar cases in the crypto space.  

Several firms started experiencing financial struggles in 2022, culminating in high-profile bankruptcies, including Terraform Labs, Celsius, Genesis, and FTX, after its stablecoin blew up. The handling of the customers in these cases raised many issues.

"In April 2022, there were a bunch of unanswered questions about how the law on these things would shake out, and we saw many crypto industry participants that were not careful about providing these services harm many customers," the SEC source revealed.

However, companies have developed specific processes to return cryptocurrencies to customers in cases of bankruptcy, as with other assets. This model means that these firms may not be required to apply the strict requirements of SAB 121 on those specific assets. The crypto community has been concerned that Staff Accounting Bulletin No. 121 might hamper the banks’ ability to protect digital assets.  

Nonetheless, the bulletin compelled firms dealing with customers’ cryptocurrencies to include these assets as liabilities in their balance sheets, a change many firms opposed. The firms have made several changes in managing their asset protection strategies, including implementing comprehensive policies and procedures for tracking and protecting these assets and identifying who is authorised to access them. The SEC source could not confirm whether firms had been given guarantees that they would not be affected by SAB 121. Yet, they pointed out that,  

"Anyone who demonstrates the ability to answer the questions raised by the SAB and has the technology and practices and procedures in place and all the things that other market participants who have come in and received this no objection guidance from our accounting staff — that is available to any entity that would want to be providing crypto asset safeguarding services."

SAB 121 Goes in Congress

In Congress, Representatives Mike Flood, a Republican from Nebraska, and Wiley Nickel, a Democrat from North Carolina, introduced a resolution at the beginning of the year to repeal a specific bulletin named SAB 121 issued in February. The House of Representatives approved the overturn of the bulletin in May, with the final count being 228 to 182. This vote saw a majority of Republicans and 21 Democrats supporting the measure. One week later, the Senate also approved the bill with a 60 to 38 vote, with some Democratic senators, including the Senate Majority Leader Chuck Schumer from New York, voting in favour of the measure.

However, President Joe Biden cast a veto on the resolution.

The following Thursday, the U.S. House tried to override President Biden’s veto, but the attempt failed. In the lead-up to this vote on Wednesday, Maxine Waters of California, the ranking Democrat on the House Financial Services Committee, addressed the ongoing talks between the SEC and a special interest group comprising large custody banks. They were coordinating to adjust the content of the bulletin so that it would not inflict harm.

Great progress was noted in these discussions, and a deal could be reached in the near future. This would enable well-regulated firms such as custody banks to offer cryptocurrency custody services within the framework set by SAB 121.