As a seasoned financial professional with over two decades of experience in the industry, I’ve witnessed numerous regulatory shifts that have either propelled or hindered growth. The ongoing saga surrounding SAB 121 and its impact on crypto custody is particularly intriguing, given its deviation from established accounting standards.
As a crypto investor, I’ve been closely following the recent developments regarding the U.S. Securities and Exchange Commission (SEC). It seems that certain Republican lawmakers are urging the SEC to reconsider and repeal a contentious rule that impacts banks dealing in cryptocurrencies. This rule has sparked quite a bit of debate within the crypto community, so it will be interesting to see how this unfolds.
On September 23rd, over forty representatives from Congress penned and dispatched letters to the leaders of four key American regulatory bodies. The content of these letters urges the agencies to collaborate on a specific issue, which revolves around a 2022 SEC communication titled SAB 121, a matter that has sparked significant debate.
One of the letters was sent specifically to SEC Chairman Gary Gensler, and interestingly, it arrived a day before he was scheduled to appear with all other SEC commissioners at a U.S. House Financial Services Committee hearing on agency oversight. The timing and content of the letter were unmistakable; it aimed solely at prompting Chair Gensler to revoke Staff Accounting Bulletin No. 121, in light of the upcoming broader SEC oversight hearing.
As a researcher, I’ve come across correspondence regarding SAB 121 that has been sent to key figures in our financial sector. Specifically, these include the Chair of the Federal Reserve, the Chair of the FDIC, and the Acting Comptroller of the Currency, all of whom have received such letters from members of Congress.
The authors of the letters are Representative Patrick McHenry (Chairman of the House Financial Services Committee) and Senator Cynthia Lummis (a known advocate for cryptocurrency. Among those who signed the letters were members from the House Financial Services Committee and the Senate Banking, Housing, and Urban Affairs Committee – specifically, Republicans.)
The letter sent to Chair Gensler plainly asserts and emphasizes that by implementing SAB 121, the SEC not only manipulated the rules for issuing guidance but instead, with this policy, the agency seems to be obstructing consumer protection and financial advancement in the United States.
“We urge you to rescind SAB 121 and work with Congress to ensure Americans have access to safe and secure custodial arrangements for digital assets.”
What is SAB 121?
The SAB 121 document, which was published by the Securities and Exchange Commission (SEC) in April 2022, is not an official SEC rule or guideline, but instead provides staff interpretations. According to the SEC’s website, this bulletin emphasizes that the custody of cryptocurrency is viewed as high-risk compared to other assets. Consequently, the SEC suggests that there should be distinct regulations for American institutions dealing with the custody of crypto due to its inherent risk.
Under SAB 121 regulations, U.S.-regulated banks providing crypto custody services should record cryptocurrencies as liabilities on their financial statements. Moreover, as per yesterday’s letter to Gensler, these banks are required to hold an equivalent offsetting asset, valued at the current market price of the customers’ digital assets. The letter also contains strong concerns about the potential consequences of this staff interpretation.
Using this accounting method, different from traditional ones, might not properly represent the legal and financial responsibilities of the custodian, potentially increasing the chances of consumer losses.
The “interpretive guidance” in SAB 121 impacts the way banks account for expenses, deviating from their usual procedure, which could potentially discourage them from offering cryptocurrency custody services altogether.
As a crypto investor, I’m finding it increasingly challenging for U.S. crypto firms like mine due to the scarcity of banks willing to work with cryptocurrency. This dwindling pool of banking partners is not only hindering the operations of existing crypto companies but also potentially discouraging new U.S.-based crypto startups from operating within the U.S. Consequently, this could weaken the growth potential of the U.S. crypto industry as a whole.
SAB 121 drew criticism from crypto and Congress
Yesterday, I penned a letter to SEC Chairman Gensler, expressing concerns shared by members of Congress regarding the recent bulletin. This correspondence mirrors criticisms voiced across the crypto sector. In the letter, we allege that the SEC employed bureaucratic maneuvers, stating that by issuing this rule under the guise of a “staff recommendation,” they were able to circumvent the necessary notice and comment process mandated by the Administrative Procedure Act.
“SAB 121 was issued without consulting any of the prudential regulators.”
Additionally, the letter asserts that mandating U.S. banks to report liability for cryptocurrency custody contradicts established accounting norms. Essentially, these lawmakers contend that by making it costly for U.S. banks to hold crypto assets and work with crypto companies, due to the high costs associated with complying with the particular rules of SAB 121, they are potentially exposing U.S. consumers to risk.
Additionally, the letter’s writers point out that rather than acknowledging the error in the bulletin and rescinding it, the Securities and Exchange Commission’s Office of the Chief Accountant has instead fueled criticism by collaborating with specific entities to bypass balance sheet reporting obligations.
The private, individual assessments carried out in this manner don’t offer enough transparency or predictability for us to trust that the rules specified by SAB 121 will be uniformly followed among various organizations.
Previous attempts to revise SAB 121 have failed
In February, four business groups petitioned the SEC to make the rules in the document less strict. Commissioner Hester Peirce of the agency referred to the directive and its accompanying suggestions as a “harmful plant.
In May, the Senate approved a resolution aimed at canceling SAB 121. This bill also passed in the House of Representatives. However, after a bipartisan vote in Congress, President Joe Biden exercised his veto power in June, disappointing the cryptocurrency community, as the bill intended to revoke SAB 121 was rejected.
On July 10, the House tried to bypass the veto, yet they were 60 votes shy of the necessary two-thirds majority needed for such an action.
The SEC introduces new rules of the game
According to a source within the SEC who is knowledgeable about the situation, as reported by Bloomberg, it appears that SEC staff have been sharing suggestions with financial institutions and brokers aimed at circumventing SEC Rule 121 regulations. This strategy seems to involve not reporting cryptocurrencies as liabilities on their respective balance sheets.
This week brought an intriguing turn of events: It appears that Bank of New York Mellon, the biggest custodial bank in the United States, was apparently given a waiver from SAB 121. The information emerged from a Wyoming legislative hearing held last week. Politicians swiftly voiced their disapproval towards the SEC’s Office of the Chief Accountant, alleging preferential treatment.
Bitcoin bull Michael Saylor, the founder of MicroStrategy, also hinted that one or more mainstream banks could soon get the green light to store cryptocurrencies.
Trustworthy whispers suggest that some prominent American banks may soon begin holding Bitcoin on behalf of their clients.
— Michael Saylor⚡️ (@saylor) September 20, 2024
Is Operation Choke Point 2.0 coming to an end?
Over the course of Biden’s administration, members of the crypto sector have repeatedly criticized U.S. regulators for what they call Operation Choke Point 2.0 – a term first used by industry expert Nic Carter in 2022 to describe the government’s indirect assault on the cryptocurrency industry. This “operation” encompasses a sequence of seemingly minor policies, instructions, and regulations like SAB 121, which critics claim collectively discourage banks from engaging with digital currencies.
In the U.S., while traditional banks aren’t explicitly forbidden from interacting with cryptocurrencies or crypto-related businesses, the guidelines of Operation Choke Point 2.0 subtly discourage them from doing so. This subtle pressure has led many financial institutions to avoid dealing with digital assets. Notably, banks such as Signature Bank and Silvergate Bank, which were heavily involved in cryptocurrency transactions, have been compelled to close their operations due to these policies.
The whispers about Bank of New York Mellon’s exemption and increasing demands for the reversal of SAB 121, as shown by yesterday’s letters, could indicate that efforts to ease federal restrictions on cryptocurrencies in the U.S. are picking up speed.
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2024-09-25 01:38