Yesterday, the U.S. House of Representatives passed a bipartisan resolution to overturn the Securities and Exchange Commission’s (SEC) SAB 121, a staff accounting bulletin that restricts banks from offering digital asset custody services. Twenty-one Democrats joined Republicans in voting in favor of the resolution, with a count of 228 and 182 against. To cancel SAB 121, the Senate has to take similar action.
SAB 121 requires listed companies, including banks, to record crypto assets as both an asset and liability on the balance sheet. This is contrary to the conventional treatment of assets under custody, which usually do not appear on the balance sheet as they belong to the client. Compliance with Basel rules for banks requires banks that provide custody to set aside a dollar of capital for every dollar held in custody. Not only does this render bank cryptocurrency custody prohibitive in the United States, but also the custody of any tokenized securities. As a result, most of the custody provided for Bitcoin ETFs is from crypto specialists such as Coinbase.
Opposition to SAB 121
There’s been considerable pushback over the rule. The Government Accountability Office (GAO) determined that SAB 121 warranted a Congressional review.
“Because they called it staff guidance, the SEC could avoid public comment and the rulemaking process governed by the Administrative Procedure Act or APA,” said House Financial Services Committee Chair 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 overseeing banks prior to issuing SAB 121.”
SEC Commissioner Hester Pierce previously noted that SAB 121 “arguably does not protect investors” as banks have better experience, given they look after trillions of dollars of customer assets. That compares to the relatively small security budgets of crypto specialists.
Several industry bodies also objected to the rule. A letter to Congress prior to the vote stated, “SAB 121 represents a significant departure from longstanding 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 penned 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 the ranking member of the House Financial Services Committee said the driver of overturning the resolution was custody banks. However, the accounting bulletin serves a wider purpose of disclosure and ensuring companies have sufficient assets in case of losses.
Custody banks have repeatedly raised this issue regarding bank capital requirements – for at least 1.5 years – to no avail. That includes a recent letter to the SEC from the industry bodies asking for limited carve outs from SAB 121. SEC Chair Gensler previously said it was up to prudential regulators.
Maxine Waters referenced that letter in her comments. “This Bill does far more than implement targeted modifications, as this letter proposed. This CRA resolution would overturn all of SAB 121, not just a part this special interest group has complained about.”
She continued, “The largest custody bank in the United States, the Bank of New York Mellon which custodies more than $45 trillion in customer assets, because they told me that they do not want this CRA and did not push for it in any way because they share our concerns about the Bill being overly broad.”
SEC to be blocked from future crypto custody guidance
“The SEC would be prohibited from issuing any guidance in the future that is substantially similar to this one, including disclosure guidance on this issue,” said Representative Waters. “This means that the SEC would not be able to simply turn around and narrowly address this one little concern while preserving the rest of the guidance.”
Congressman Flood, one of the authors of the resolution, retorted, “The easiest way to fix this problem is for the SEC to simply rescind the bulletin themselves and work with the prudential regulators on an alternate solution. The SEC has been unwilling to have any conversation about making changes. That leaves us with no choice.”
He also said it was a bigger issue than crypto custody, adding, “If we don’t pass this resolution, we are effectively giving the green light to our regulators to bypass the APA rulemaking process with immunity.”
The last word goes to the White House, which says it objects to overturning SAB 121 and the President will veto the resolution if it’s presented to him. The statement says the resolution will “inappropriately constrain the SEC’s ability to ensure appropriate guardrails and address future issues related to crypto-assets including financial stability.”
Update: added the final paragraph regarding the White House statement
