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Congress Passes Resolution to Overturn SEC Cryptocurrency Custody Rule – Ledger Insights
Yesterday the US House of Representatives passed a bipartisan resolution to overturn the Securities and Exchange Commission (SEC) SAT 121, an accounting staff bulletin that prohibits banks from offering digital asset custody services. Twenty-one Democrats joined Republicans in voting for the resolution, by a tally of 228 to 182. To overturn SAB 121, the Senate must take similar action.
SAB 121 requires listed companies, including banks, to record cryptocurrencies as both assets and liabilities on their balance sheets. This is contrary to the conventional treatment of assets in custody, which usually do not appear on the balance sheet because they belong to the client. Compliance with the Basel rules for banks requires banks that provide custody to set aside one dollar of capital for every dollar held in custody. This not only makes bank custody of cryptocurrencies in the United States prohibitive, but also custody of any tokenized security. As a result, most of the custody provided for Bitcoin ETFs comes from cryptocurrency specialists like Coinbase.
Opposition to BRS 121
There has been considerable resistance to the rule. This was established by the Government Accountability Office (GAO). SAT 121 warranted a congressional review.
“Because they called it staff guidance, the SEC was able to avoid public comments and the rulemaking process governed by the Administrative Procedure Act, or APA,” said House Financial Services Committee Chairman Patrick McHenry.
“Not only did the SEC bypass Congress and the Comptroller General, but the Commission did not even consult with the prudential regulators responsible for supervising banks before issuing SAB 121.”
SEC Commissioner Hester Pierce had already noticed this that SAB 121 “probably does not protect investors” because banks have better track record as they look after trillions of dollars of client assets. This compares to the relatively small security budgets of cryptocurrency specialists.
Several industry bodies have also opposed the rule. A letter to Congress before the vote declared, “SAB 121 represents a significant departure from the long-standing accounting treatment for custodial assets and threatens the industry’s ability to provide its customers with safe and sound custody of digital assets.” It was written by the American Bankers Association (ABA), the Bank Policy Institute, the Financial Services Forum, and the Securities Industry and Financial Markets Association (SIFMA).
Some Democrats wanted a different approach
Not everyone disapproves of SAB 121. Maxine Waters, a ranking member of the House Financial Services Committee, said the driver of overturning the resolution was custodian banks. However, the accounting bulletin has a broader purpose of disclosure and ensuring that companies have sufficient resources in the event of losses.
Custodian banks have repeatedly raised the issue of bank capital requirements – for at least a year and a half – to no avail. This includes a recent letter to the SEC by industry bodies seeking limited exceptions to SAB 121. SEC Chairman Gensler previously said the decision was up to prudential regulators.
Maxine Waters referenced that letter in her comments. “This bill does much more than implement targeted changes, as this letter proposed. This CRA resolution would overturn the entire SAB 121, not just a portion that this special interest group complained about.”
He continued: “The largest custodian bank in the United States, the Bank of New York Mellon which holds more than $45 trillion in client assets, because they told me they don’t want this CRA and they didn’t insist in any way because they share our concerns that the bill is overly broad.”
SEC Will Be Blocked From Future Crypto Custody Guidelines
“The SEC would be prohibited from issuing any future guidance substantially similar to this, including disclosure guidance on this topic,” Rep. Waters said. “This means that the SEC would not be able to simply turn around and narrowly address this small concern while preserving the rest of the guidelines.”
Congressman Flood, one of the authors of the resolution, countered: “The easiest way to resolve this problem is for the SEC to simply rescind the bulletin and work with prudential regulators on an alternative solution. The SEC has been unwilling to have any conversations about whether to make changes. This leaves us no choice.”
He also said this is a bigger issue than cryptocurrency custody, adding: “If we don’t pass this resolution, we are effectively giving the green light to our regulators to bypass the APA regulatory process with immunity.”
The final say lies with the White House, which says it opposes rescinding SAB 121 and that the President will veto the resolution if it is presented to him. THE declaration states that the resolution will “inappropriately constrain the SEC’s ability to ensure adequate safeguards and address future issues related to crypto-assets, including financial stability.”
Update: added the last paragraph regarding the White House statement