Over 40 Republicans Urge SEC to Rescind SAB 121 Rule That Targets Digital Asset Custody

Highlights:

• Over 40 Republicans urge the SEC to rescind SAB 121.
• They believe the rule stifles the cryptocurrency industry and harms consumers.
• The lawmakers’ appeal underscores growing concerns over the SEC’s regulatory practices.

Forty-two United States Republicans have called on the US Securities and Exchange Commission (SEC) to rescind its special accounting rule for crypto assets, Staff Accounting Bulletin 121 (SAB 121). In a Sept. 23 letter to SEC Chair Gary Gensler, they highlighted that SAB 121 upends custody rules for cryptocurrencies, stifles financial innovation, and weakens consumer protections.

The letter, spearheaded by House Financial Services Chair Rep. Patrick McHenry and Sen. Cynthia Lummis (R-Wyo.), follows the passage of legislation in both congressional chambers aimed at overturning the rule, which President Biden vetoed in May. The appeal was signed by 13 senators and 29 House members, mainly from financial committees.

🚨42 Members of Congress (led by @SenLummis and @PatrickMcHenry) have called on @GaryGensler to rescind SAB 121

This comes as Gensler and the full Commission prepare to testify tomorrow morning before @FinancialCmte

As a reminder, SAB 121 creates untenable conditions for… pic.twitter.com/WQQagk1nGm

— Taylor Barr (@taylorjbarr) September 23, 2024

Concerns Raised Over SAB 121’s Impact on Crypto Custodians and Industry

According to the letter, SAB 121 places excessive burdens on crypto custodians by requiring them to classify customer assets as liabilities on their balance sheets. They argue that this accounting rule exaggerates custodians’ legal obligations and increases risks for consumers. This guidance has led to significant backlash from the industry, making it harder for banks and financial institutions to provide digital asset services. The 42 politicians claimed that SAB 121 was issued without consulting any “prudent regulators” and that the accounting approach “deviates from established accounting standards.”

 Further, they added:

“By issuing this rule under the guise of staff guidance, the SEC evaded the notice and comment rulemaking process required by the Administrative Procedure Act. Rescinding SAB 121 is the only appropriate action and well within the SEC’s authority.”

Lawmakers Criticize SEC’s SAB 121 Practices Ahead of Gensler’s Testimony

The letter raised additional concerns about the SEC’s use of SAB 121. Lawmakers accused the SEC’s Office of Chief Accountant of holding private meetings with certain industry players, allowing them to bypass the balance sheet disclosure rules of the bulletin. This selective approach, as noted in the letter, has created confusion and inconsistent application of SAB 121, undermining its credibility. These lawmakers’ actions reflect growing scrutiny of the SEC’s regulatory stance on cryptocurrencies.

The push to revoke Staff Accounting Bulletin 121 comes just before US SEC Chair Gary Gensler’s testimony before Congress on September 24 and 25. Lawmakers are expected to ask tough questions about the agency’s enforcement actions in the digital asset sector. The hearings will likely cover SAB 121 and broader issues regarding the SEC’s overall approach to regulating digital assets.

Ritchie Torres Claims SEC Misuses SAB 121 Against Crypto Custody Providers

U.S. Representative Ritchie Torres has strongly criticized the SEC’s SAB 121 policy, claiming it conflicts with generally accepted accounting principles (GAAP). He accused the SEC of hindering innovation by discouraging companies from pursuing blockchain technology. “There is something profoundly un-American about banning innovation,” Torres remarked.

The SEC has a policy, known as SAB 121, that requires banks to put custodial assets on their own balance sheets—in violation of generally accepted accounting principles.

The SEC is effectively ordering companies not to experiment with blockchain technology. There is… pic.twitter.com/VbI8O442mu

— Rep. Ritchie Torres (@RepRitchie) September 20, 2024

SAB 121 stands out as the sole crypto issue uniting Congress, allowing bipartisan legislation to pass through both chambers successfully. U.S. presidential candidate Kamala Harris recently endorsed digital assets. Following her remarks and the debate with Donald Trump, crypto will likely become a key point of contention between them.