SAB 121, the SEC’s accounting bulletin that blocks banks from providing digital asset custody, was up for debate again in Congress yesterday. After both the House and Senate voted to cancel SAB 121, the President vetoed their resolution, meaning the custody blocker still stands. The House had planned a vote to overturn the veto, requiring two thirds in favor. They held the debate yesterday, but postponed the vote. [Update: the vote failed]. In her testimony, Maxine Waters, the ranking member on the Financial Services Committee, said the SEC is discussing amending the rule for banks.
“One special interest group representing large custody banks has provided the SEC with targeted modifications to SAB 121, which would avoid the sledgehammer effect of this legislation,” said Ms Waters.
“So I understand that the SEC may be close to reaching an agreement on these modifications, which would ensure that well-regulated entities like custody banks can offer crypto custody services consistent with SAB 121. Nevertheless, despite the fact that this issue will soon be moot, Republicans are pushing ahead anyway with this blunt and overly broad approach. So I urge my colleagues to oppose this veto override.”
Democrat Congressman Sherman didn’t want Democrats to oppose the veto because it would make the President look bad.
He said those who vote against the veto would have to explain themselves to the press. “You repudiated the President because of deeply held concerns on what assets should and should not be on the balance sheet. But they will not listen. They will tell you, you voted to override a presidential veto this very week,” said Congressman Sherman.
Meanwhile, Fox News said Republicans weren’t hopeful of achieving a two thirds vote needed to set aside the veto.
Most are unaware of SAB 121 concession
Patrick McHenry, who Chairs the Financial Services Committee, said this was the first time he heard of any SAB 121 deal. He referred to it as a ‘carve out’, although the only companies really affected by SAB 121 are precisely these custody banks.
“Just because we have a rumor that two people are talking or 10 people are talking, that’s not the way a great state should do business,” said Representative McHenry.
It’s possible banks are also unaware of this move, because yesterday the four trade associations jointly lobbying on behalf of the banks wrote a letter to the House Democrat and Republican leaders supporting the cancellation of SAB 121.
The potential crypto custody amendments
They sent a letter to the SEC in February highlighting that SAB 121 blocks banks from providing custody for cryptocurrencies, including for the wave of spot Bitcoin ETFs issued in January. Additionally, it prevents them providing custody for tokenized securities, a key reason for institutional tokenization activity happening outside the United States.
The trade bodies made two requests. Firstly, they asked for the definition of crypto-assets to exclude tokenized securities. If the SEC agrees to this point, it would still prevent banks from providing cryptocurrency custody resulting in a continued concentration of risk with a small number of custodians, many of whom are startups.
The SAB 121 requirement that digital assets under custody be shown as both an asset and liability on the balance sheet only poses a real problem for banks. That’s because their capital requirements are based on their balance sheets. Hence, the trade associations’ second request is that the SEC allows the banks to provide details in the notes instead. If the SEC changed only this point, it removes the key objection to the accounting rule.
If SAB 121 is cancelled, it would prevent the SEC providing further guidance in this area. Democrat Representatives raised concerns that this would mean that crypto under custody would not be disclosed in the notes.
Given the vote was postponed, perhaps we will see amendments to SAB 121 in the coming days.
