Bipartisan Effort to Challenge SEC Crypto Custodian Rule

Bipartisan Effort to Overturn SEC Accounting Standard on Crypto Custodians

In a notable bipartisan effort, U.S. lawmakers are seeking to overturn a Securities and Exchange Commission (SEC) accounting standard that imposes restrictions on crypto custodians. Senator Cynthia Lummis (R-WY) and Representatives Wiley Nickel (D-NC) and Mike Flood (R-NB) have jointly introduced a resolution in both the Senate and the House of Representatives aimed at repealing SEC Staff Accounting Bill (SAB) 121.

Key Points Highlighted by Lawmakers:

• Senator Lummis emphasized that the Government Accountability Office (GAO) identified SAB 121 as a rule subject to the Congressional Review Act, highlighting that the standard was issued without Congressional or GAO consultation, rendering it unenforceable.
• Lummis expressed concerns about granting the SEC regulatory authority over institutions without proper authorization from Congress.
• Representative Flood criticized the SEC for exceeding the scope of an accounting bulletin, labeling it as an “overreach.”

Impact of SAB 121:

• Enacted in March 2022, SAB 121 mandates companies custodying cryptocurrency to disclose liabilities and corresponding assets on their balance sheets.
• Industry bodies, including the American Bankers Association and the Securities Industry and Financial Markets Association (SIFMA), have raised alarms, asserting that SAB 121 deviates significantly from traditional accounting practices for custodied assets, potentially jeopardizing the banking sector’s ability to provide secure custody of digital assets.

Recent SEC Actions and Pushback:

• The SEC’s approval of multiple spot Bitcoin ETFs in the U.S. earlier this year was met with skepticism from lawmakers and the judiciary.
• Following a court order that prompted a reassessment of the SEC’s stance on digital assets, Chair Gary Gensler conceded to changing circumstances, hinting at a shift in regulatory approach.
• U.S. District Judge Katherine Polk Failla questioned the SEC’s broad interpretation of securities laws concerning digital assets, signaling ongoing scrutiny over the regulator’s regulatory tactics.

The bipartisan move to challenge SAB 121 underscores the complex landscape surrounding crypto regulations and the ongoing dialogue between lawmakers, regulators, and industry stakeholders.