Republican lawmakers penned a letter urging the SEC to rescind the controversial SAB 121 digital assets custody rule.
The Sept. 23 letter by 40 lawmakers urges the Securities and Exchange Commission (SEC) to repeal the Staff Accounting Bulletin (SAB) 121. The legislators illustrate SAB 121 is likely to aggravate consumer risks, disrupt financial innovation, and prevent banks from undertaking custodial services.
The Monday letter to SEC chair Gary Gensler once again urged the agency to abandon the controversial crypto custody rule. The US House Financial Services Committee (HFSC) Chair Patrick McHenry and Senator Cynthia Lummis co-le the lawmakers group. The attempt emerged after Congress enacted the bipartisan repeal of SAB 121, which US President Joe Biden vetoed.
Lawmakers Petition for Crypto Rule Repeal
The letter revives the criticism in the absence of explicit digital assets rules. The critics illustrate the Commission appears to pursue regulation via litigation. The SAB121 has faced criticism since its March 2022 implementation for disrupting the traditional accounting standards, thereby exposing financial institutions to pressure.
The legislators demonstrate that SAB 121 obligates crypto custodians to treat crypto assets as liabilities. Fulfilling this requirement on the balance sheets scales the consumer risks while weakening financial innovation. The lawmakers argue that SAB 121 could discourage financial institutions from offering custodial services for crypto.
The politician noted in the letter that SAB 121 provisions deviate from the established accounting standards. It fails to accurately reflect the legal and economic obligations undertaken by the custodian. The deviation leaves the consumers vulnerable to losses.
The SAB 121 rule aims to resolve the risks of holding digital assets. On the contrary, the detractors illustrate that compliance with the SAB 121 has the opposite impact.
The lawmakers opposed the SAB 121 and opined that it stifles innovation by forcing crypto custody on non-bank entities. The legislators warn that such is a ground for concentrated risks.
The critics allege SAB 121 is a product of the SEC bypassing the Administrative Procedure Act (APA). The APA mandates the agency to issue a formal notice-and-comment period for the newly formulated regulations.
The letter cites the absence of transparency when implementing SAB 121, alleging collusion with institutions privately to facilitate them avoid compliance. While President Biden vetoed the resolution repealing SAB 121, alleging financial stability threat and weakening investor protection, the concerns are contentious.
The attempts by the Representatives House to override the veto turned futile on July 10. The legislators were unable to attain the two-thirds supermajority.
The vote attained 21 Democrats joined 207 Republicans supporting the repeal, unable to meet the threshold. The voting pattern mirrored May when the bill was subjected to the vote.
The quest to override the veto saw 183 Democrats oppose the measure, thereby delivering a significant setback for the repeal. The episode angered the group, already at odds with the SEC’s stance against the digital asset industry.
SEC Chair Defends SAB 121
The SEC chair appears not to back down despite the criticism towards SAB 121. Despite facing loud opposition from digital assets advocates and lawmakers alike, Gensler considers SAB 121 a critical shield for institutions against crypto assets volatility.
Gensler addressed the Congress on Tuesday, Sept. 24, face-off with lawmaker Wiley Nickel, who alleged the Commission overstepped authority with SAB 121. The Congressman decried the rule as harming investors and the digital asset industry, adding that the SEC overlooked multiple requests for dialogue.
Gensler illustrated the FTX, Celsius, and Terraform implosion to justify the accounting bulletin as preventing the crypto firms from collapsing under their liabilities. The chair demonstrates reporting the crypto held as liabilities will shield the entities from their unpredictable nature.
Critics allege the SAB 121 rule is wreaking havoc on the crypto-friendly banks and custodians – namely Silvegate and Custodia. The SEC appears to impose a chokehold on such innovation that critics call double standard when it granted BNY Mellon approval to offer custodian services to the exchange-traded fund (ETF) issuers.
Representative Tom Emmer exposed the Commission’s missteps, accusing Gensler of overseeing an aggressive crackdown. The Congressman slammed the inconsistent application of rules, branding the tenure as historically destructive to digital assets innovation.
Rep. Emmer faulted the SEC in the Debt Box case, with the agency incurring $1.8 million in legal fees. Although Gensler admitted the errors, the SEC will not loosen the grip given the apparent risk that SAB 121 seeks to resolve.
Editorial credit: JRdes / Shutterstock.com
All trademarks, logos, and images displayed on this site belong to their respective owners and have been utilized under the Fair Use Act. The materials on this site should not be interpreted as financial advice. When we incorporate content from other sites, we ensure each author receives proper attribution by providing a link to the original content. This site might maintain financial affiliations with a selection of the brands and firms mentioned herein. As a result, we may receive compensation if our readers opt to click on these links within our content and subsequently register for the products or services on offer. However, we neither represent nor endorse these services, brands, or companies. Therefore, any disputes that may arise with the mentioned brands or companies need to be directly addressed with the respective parties involved. We urge our readers to exercise their own judgement when clicking on links within our content and ultimately signing up for any products or services. The responsibility lies solely with them. Please read our full disclaimer and terms of use policy here.