On February 29, 2024, the U.S. House of Representatives Financial Services Committee passed a resolution (H.J. Res. 109) which, if enacted, would undo the recent US Security and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 121 (“SAB 121”). It acted under the Congressional Review Act (“CRA”), which allows Congress to use their oversight authority to overturn rules issued by federal agencies.
SAB 121 requires reporting entities which perform custodial duties in relation to crypto assets to include the safeguarding of crypto assets as a liability and a corresponding asset on their balance sheets, reported at fair value. The SEC position is that compliance with SAB 121 would increase transparency to investors in companies which perform crypto asset custodial duty and address the situation seen in multiple crypto firm collapses over the last several years – that is, the company collapses and when the customers/investors attempt to regain their assets, it turns out the company no longer has them. ‘Fair value’ is to be determined in accordance with US GAAP principles provided in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820.
It should be noted that the SEC position is that SAB 121 is not a rule but, rather, nonbinding staff guidance. It nevertheless fell under potential CRA review because of a Government Accountability Office finding that the bulletin met the definition of a rule under the Administrative Procedure Act in that it described a policy for future effect.
According to proponents of H.J. Res. 109, the resolution cancelling SAB 121 is needed in order to halt the bulletin’s potential chilling effect on the industry. If banks are required to track safeguarded assets on their balance sheets, this would lead to increased regulatory compliance issues, making it an easier decision to simply refrain from such crypto asset safeguarding transactions. As evidence of this, proponents point to the fact that no established banks were involved as a custody provider in the recent wave of transactions following the approval of Bitcoin spot-ETFs.
Conversely, detractors highlight the SEC position that the bulletin is nonbinding staff guidance – not a rule subject to the CRA. They also argue that the chilling effect of which legislators should beware is that the enactment of H.J. Res. 109 would not only cancel SAB 121 but also prevent the SEC from issuing a substantially similar bulletin in the future. This could lead to reticence on the part of the SEC to provide guidance in a rapidly evolving industry.
The resolution now proceeds to the floor for a vote before the full House of Representatives. There is also a similar bill pending in the Senate. H.J. Res. 109 is a bipartisan measure, whereas the Senate measure was introduced by Republican Senator Lummis of Wyoming. The move to repeal SAB 121 has been largely welcomed by the industry as the bulletin is seen as an effort to make it more difficult for companies to provide custodial services for crypto assets. While this measure is not likely to become law in the near future, it does highlight Congress’ focus on crypto issues and the diverging viewpoints on how to address them. On the one hand regulators, in particular the SEC, continue to issue regulations aimed at providing increased transparency and customer/investor protections; on the other hand, the industry attempts to push back when the regulations become burdensome to the point of stifling the industry’s growth.
