We previously reported about action by the U.S. House of Representatives concerning U.S. Security and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 121 (“SAB 121”), which was issued on March 31, 2022. It requires reporting entities which perform custodial duties in relation to crypto assets to hold those assets on their balance sheet. Doing so means these entities would also be required to take on significant capital, liquidity, and other costs under the existing prudential regulatory framework. SAB 121 thus represented a significant departure from decades of generally accepted off-balance sheet accounting treatment for custodied assets.
As we reported, On May 8, 2024, the U.S. House of Representatives passed H.J. Res. 109, which sought to overturn SAB 121. All 207 Republicans who voted on H.J.R. 109, voted in favor. And, even in the face of President Biden’s stated opposition, 21 Democrats voted in favor as well. The Senate followed suit, with 11 Democrats joining all the Republicans.
President Biden vetoed the bill on May 31, 2024, stating:
SAB 121 reflects considered technical SEC staff views regarding the accounting obligations of certain firms that safeguard crypto-assets. By virtue of invoking the Congressional Review Act, this Republican-led resolution would inappropriately constrain the SEC’s ability to set forth appropriate guardrails and address future issues. This reversal of the considered judgment of SEC staff in this way risks undercutting the SEC’s broader authorities regarding accounting practices.
On July 11, 2024, the House failed in its efforts to override the veto. A super-majority 2/3 vote was required. There were 228 votes in favor of overriding the President’s veto, including 21 Democrats, and 184 against.
The Chairman of the House Financial Services Committee, Republican Patrick McHenry, said that “SAB 121 is one of the most glaring examples of the regulatory overreach that has defined Gary Gensler’s tenure at the SEC. It limits consumers’ options to safely custody their digital assets, upends decades of bank custody practices, and increases concentration risk.” On the other side, Democrat Ranking Member Congresswoman Maxine Waters said, “I understand that the SEC may be close to reaching an agreement on these modifications, which would ensure that well-regulated entities, like custody banks, can offer crypto custody services consistent with SAB 121. Nevertheless, despite the fact that this issue will soon be moot, Republicans are pushing ahead anyway with this blunt and overly broad approach.”
Because the override failed, SAB 121 remains in place. The sponsor of H.J.R. 109, Rep. Mike Flood said he would be working with colleagues to pursue other pathways to end SAB 121. Relatedly, Bloomberg Tax is reporting that the SEC is allowing some exceptions to compliance with SAB 121. It says that “several large banks that have consulted with SEC staff starting in 2023 got the green light to bypass the balance sheet reporting by ensuring their customers’ assets would be protected in the event of a bankruptcy or failure.”
