At the end of May President Biden vetoed a bipartisan resolution in the House and Senate that aimed to cancel SEC accounting rule SAB 121, which prevents banks from providing digital asset custody. This week’s House schedule indicates another vote is on the cards. It’s possible to override a Presidential veto, but it needs a two thirds majority in both the House and Senate. A normal vote only requires a simple majority.
Update: The vote failed to achieve two thirds and Congresswoman Waters says the SEC is working on a SAB 121 amendment.
During May the House passed a resolution to cancel SAB 121 with a vote of 228 versus 182 and the Senate likewise voted 60 to 38. Both votes fall short of the two thirds required to override a veto, with the House further away.
If lawmakers successfully cancel SAB 121, then the SEC could not provide guidance on crypto custody in the future. However, it has had ample opportunity to amend SAB 121 given industry and lawmakers raised the topic over an extended period.
SAB 121 requires listed firms to show digital assets held in custody as both an asset and liability on their balance sheet, contrary to accounting convention. It particularly impacts banks, because laws require them to set aside risk capital based on their balance sheet. This makes it prohibitively expensive for banks to provide crypto custody and is the reason none provide crypto custody for the Bitcoin ETFs. The SEC did not consult bank regulators before publishing SAB 121.
The bank crypto custody rollercoaster
Crypto custody has proven a rollercoaster ride for U.S. banks. Large custodian banks such as BNY Mellon and State Street were gearing up for crypto custody, only to encounter two blockers.
Firstly, there was the Basel rules for bank treatment of crypto. When the Basel Committee published final rules in late 2022, they did not require crypto held in custody to be shown on the balance sheet. This appeared to be a green light. However, in late March 2022 the SEC had published SAB 121 which meant that international banks could provide custody, but not U.S. ones. The SEC chose not to amend SAB 121 even though it conflicted with the Basel proposals.
Republican lawmakers raised the issues with the SEC and the Government Accountability Office found that SAB 121 was a rule that warranted Congressional review. Some time passed before the resolution to overturn SAB 121 came up for a vote. After the first vote in the House, the White House warned it planned to veto the resolution. And it did so after the Senate vote.
Will an election year make a difference in attempting to ‘veto the veto’? On the one hand, SAB 121 seems pretty obscure, even for the crypto crowd. Stablecoin or crypto legislation is far higher priority for crypto voters.
On the other hand, if someone hacked one of the ETF custodians, all eyes would be on the SEC for preventing banks from providing custody. While startups may be more tech savvy, custody banks have experience of looking after tens of trillions in assets, and all the budget and pedantic security protocols that go hand in hand. For its part, the SEC will doubtless argue that it could be a bank that’s hacked, which might cause damage to the bank’s brand, never mind its balance sheet.
