Republican lawmakers are pressing the U.S. Securities and Exchange Commission to repeal a controversial rule for banks dealing with cryptocurrencies.
Yesterday, September 23, a group of more than 40 members of Congress met sender A group of investors have signed letters to the heads of four major U.S. regulatory agencies, calling on regulators to communicate through agencies about a particularly controversial 2022 SEC Bulletin, known as SAB 121.
One of the letters The letter was addressed to SEC Chairman Gary Gensler — just one day before Gensler joined all of his fellow SEC commissioners at a House Financial Services Committee hearing on the agency’s oversight. The timing and message were clear — ahead of today’s broader SEC hearing, the letter had a single focus on the SEC in particular: “urging” SEC Chairman Gensler to repeal Employee Accounting Bulletin No. 121.
The Federal Reserve Chairman, the FDIC Chairman, and the Acting Comptroller of the Currency also received letters on H.R. 121 from members of Congress.
The letter writers include House Financial Services Committee Chairman Patrick McHenry and cryptocurrency advocate Sen. Cynthia Lummis. Signatories include Republicans on the House Financial Services Committee and the Senate Banking, Housing and Urban Affairs Committee.
The letter to SEC Chairman Gensler makes clear and bold claims that the SEC, through issuing SAB 121, has not only distorted the rules for issuing its guidance, but that the agency, through SAB 121, is actually impeding consumer protection and financial innovation in the United States:
“We urge you to repeal Senate Bill 121 and work with Congress to ensure that Americans have access to safe and secure custody arrangements for digital assets.”
What is SAB 121?
SAB 121 is a Securities and Exchange Commission Staff Bulletin issued in April 2022. According to the SEC WebsiteThe circular does not represent official SEC guidance or rules, but rather “staff interpretations.” The document explains that the SEC considers cryptocurrency custody to be particularly risky, compared to other assets. Given these risks, the agency argues in the circular that there should be specific rules for U.S. institutions that hold cryptocurrencies.
The key guidance set forth in SAB 121 is, first, that any U.S.-regulated bank offering crypto custody services must reflect cryptocurrency as a liability on its balance sheet. Second, as yesterday’s letter to Gensler explains, the bank must also “retain a corresponding consideration on its balance sheet, measured by the fair value of the customer’s digital assets.” The letter continues with a scathing critique aimed at the implications of the staff’s interpretation:
“This accounting approach, which deviates from established accounting standards, would fail to accurately reflect the trustee’s underlying legal and economic obligations, and would expose consumers to greater risk of loss.”
The “interpretative guidance” in SAB 121 also affects banks’ accounting expenses – as they differ from their standard process – and thus arguably prevents them from offering crypto custody services at all.
The result is a particular paralysis for US crypto companies, which require a banking partner to deal with cryptocurrencies. As the number of banks willing to work with crypto companies declines, it can be argued that US-based crypto startups are also retreating from doing business in the US, thus weakening the potential for the development of the US crypto industry.
SAB 121 has drawn criticism from cryptocurrencies and Congress.
In a letter yesterday to SEC Chairman Gensler, members of Congress outlined their criticism of the circular, echoing criticism from the broader crypto industry. The letter accuses the SEC of bureaucratic chicanery, alleging that the regulator, which issued the rule under the guise of a “staff recommendation,” was able to bypass the notice-and-comment process required under the Administrative Procedures Act:
“Standard No. 121 was issued without consultation with any prudent regulators.”
Furthermore, the letter alleges that actually requiring U.S. financial institutions to file liability reports specifically for cryptocurrency custody “violates established accounting standards.” Ultimately, the lawmakers allege that discouraging U.S. banks from holding cryptocurrencies and working with crypto companies—given the high cost of following the specific rules of SAB 121—ends up putting American consumers at risk.
The letter’s authors also point out that instead of admitting that the prospectus was a mistake and rescinding it, the SEC’s Office of the Chief Accountant invited further backlash by working with certain institutions to avoid balance sheet reporting requirements:
“These consultations, which are conducted on a case-by-case basis and in strict confidence, do not provide the transparency or certainty necessary to ensure that SAB 121 requirements are applied consistently across different institutions.”
Previous attempts to review SAB 121 have failed.
In February, four industry organizations met. He asked The SEC has called for the document to be relaxed. SEC Commissioner Hester Peirce has called the prospectus and related administrative recommendations “a weed.”
In May, the Senate passed a resolution to repeal SAB 121. The House of Representatives also passed the bill. But despite a bipartisan vote in Congress, President Joe Biden vetoed the bill that would have repealed SAB 121 in June, much to the dismay of the crypto community.
The House attempted to override the veto on July 10, but failed to get the two-thirds majority needed to do so by 60 votes.
The US Securities and Exchange Commission sets new rules of the game
Citing a SEC source familiar with the matter, Bloomberg previously reported: Reported The SEC has begun circulating recommendations to institutions and brokers on how to circumvent SAB 121 by avoiding reflecting cryptocurrencies as liabilities on their balance sheets.
Then an interesting development came out this week: Bank of New York Mellon, the largest custodian bank in the United States, has reportedly been granted an exemption from Senate Bill 121. The report came from the Wyoming legislature. Hearing Last week, politicians were quick to criticize the SEC’s chief accountant’s office, accusing it of favoritism.
Michael Saylor, founder of MicroStrategy, has hinted that one or more major banks may soon get the green light to store cryptocurrencies.
Is Operation Chokepoint 2.0 Nearing Its End?
For years, under the Biden presidency, the crypto industry has been criticizing U.S. regulators for pursuing what is widely known in the industry as Operation Choke Point 2.0 — a term coined by crypto investor and industry figure Nic Carter in 2022 to refer to the U.S. government’s unofficial assault on the crypto industry. The wide-ranging “operation” consists of a series of seemingly small policies, guidelines, and rules — such as SAB 121 — that critics claim systematically deters banks from dealing with cryptocurrencies.
While traditional financial institutions in the United States are not prohibited from dealing with cryptocurrencies or cryptocurrency companies openly, the policies that make up Operation Choke Point 2.0 effectively discourage banks and other financial institutions from dealing with cryptocurrencies. As a result of these policies, several banks that primarily dealt with digital assets—most notably Signature Bank and Silvergate Bank—have ended up being forced to close their businesses.
Rumors of a Bank of New York Mellon exemption and the many calls to repeal SAB 121 — yesterday’s letters are the latest example — may mean that the easing of federal measures against cryptocurrencies in the United States is gaining momentum.