In a significant development for the cryptocurrency industry, the House Financial Services Committee (HSFC) has voted in favor of a resolution aimed at overturning a guideline set by the United States Securities and Exchange Commission (SEC) that currently restricts banks from engaging in crypto custody services. During a February 29 markup hearing, a bipartisan group of 31 HSFC members supported the resolution, with 20 members opposing it.
Targeting SEC’s SAB 121 Guidelines
The resolution seeks to reverse the SEC’s Staff Accounting Bulletin No. 121 (SAB 121), introduced in March 2022. SAB 121 mandates that institutions holding crypto assets must record these holdings as liabilities on their balance sheets, a requirement that significantly impacts the banks’ regulatory obligations regarding capital and liquidity.
Republican Congressman Mike Flood, who introduced the resolution alongside Democrat Representative Wiley Nickel, criticized SAB 121 for unfairly applying on-balance sheet treatment to digital assets, contrasting with the traditional handling of custodial assets like securities.
Implications for Banks and the Crypto Ecosystem
By challenging SAB 121, lawmakers aim to protect consumers by enabling highly regulated banks to serve as custodians for digital assets, thereby promoting a safer and more integrated approach to cryptocurrency custody. The resolution argues that SAB 121 oversteps the intended scope of an accounting bulletin, effectively acting as a de-facto law.
Congressional and Industry Reactions
The resolution has garnered mixed reactions from Congress members. Crypto-friendly Republican Congressman Tom Emmer criticized SAB 121 as an “illegal” manifestation of SEC Chair Gary Gensler’s bias against the digital asset ecosystem, highlighting the risks of excluding banks from providing custodial services for Bitcoin ETFs. Conversely, Democrat Congresswoman Maxine Waters described the move to rescind SAB 121 as “ironic,” pointing out the cryptocurrency industry’s frequent calls for regulatory clarity from the SEC.
Next Steps and Regulatory Considerations
For the resolution to effectively overturn SAB 121, it must still pass through a full floor vote in both the House and the Senate. This vote represents a crucial step toward reconciling the regulatory framework surrounding cryptocurrencies with the evolving needs and practices of the financial industry.
Staff Accounting Bulletins, including SAB 121, serve as non-binding guidelines rather than enforceable laws, providing insight into the SEC staff’s interpretation of accounting principles for crypto holdings. The debate over SAB 121 underscores the ongoing dialogue between regulatory bodies, lawmakers, and the cryptocurrency industry regarding the optimal approach to digital asset custody and regulation.
