On Friday, May 31, 2024, United States President Joe Biden vetoed a congressional resolution that would have overturned a controversial Securities and Exchange Commission (SEC) bulletin.
The Staff Accounting Bulletin No. 121 (SAB 121) provides guidance for financial service companies that perform custodial obligations to safeguard crypto assets.
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The SEC argues that there are “unique risks”, including technological, legal, and regulatory risks, involved with dealing with crypto assets, and that these make it so that the financial firms, holding the crypto assets for the customer, must record the assets on their own balance sheets. According to CoinDesk, this would require capital to be maintained against the crypto assets.
Essentially, as per TechCrunch, firms that safeguard customers’ crypto assets would be forced to treat the assets as liabilities.
Since its implementation in 2022, the SAB 121 has garnered criticism for a couple of reasons.
Firstly, critics argue that the guidance makes investing in crypto assets less safe. It allegedly disincentivizes financial firms from offering well-regulated custody services, potentially pushing crypto asset custody into less regulated sectors.
In a joint letter written by The Bank Policy Institute, the American Bankers Association, the Financial Services Forum, and the Security Industry and Financial Markets Association, the associations, state that,
“Digital asset custodial services are currently offered by various non-banking organizations, … Indeed, if regulated banking organizations are effectively precluded from providing digital asset safeguarding services at scale, investors and customers, and ultimately the financial system, will be worse off, with the market limited to custody providers that do not afford their customers the legal and supervisory protections provided by federally-regulated banking organizations.”
Another criticism is simply that the SAB 121 is regulatory overreach. In October, 2023, a US Government Accountability Office (GAO) report reached the conclusion that the bulletin should have been treated as a formal rule and thereby have gone through a submission to the US Congress before going into effect.
The congressional resolution H.J.Res. 109, aimed at overturning SAB 121, passed through both the House and Senate with primarily Republican support. However, it also saw some Democratic support, including Majority Leader Chuck Schumer in the Senate and two Democratic co-sponsors in the House.
Ultimately, however, once it landed on the President’s desk it was vetoed.
Biden explained his decision saying in a statement,
“This reversal of the considered judgment of SEC staff in this way risks undercutting the SEC’s broader authorities regarding accounting practices. My Administration will not support measures that jeopardize the well-being of consumers and investors. Appropriate guardrails that protect consumers and investors are necessary to harness the potential benefits and opportunities of crypto-asset innovation."
