- The recent accounting guidelines issued by the SEC, known as SAB 121, require banks and companies to list crypto assets held for clients as liabilities on their balance sheets, complicating the provision of crypto custody services.
- Bipartisan efforts in both the House and Senate aimed to nullify this guidance via the Congressional Review Act, but the initiative faced a setback after being vetoed by President Biden and failing to gather enough votes to overturn the veto in the House.
- In response to stakeholder concerns, the SEC has started offering a pathway for banks and brokerages to circumvent the strict SAB 121 requirements under specific conditions aimed at mitigating associated risks.
This article delves into the complexities surrounding SEC’s SAB 121, recent legislative efforts to counteract it, and the implications for the financial industry’s handling of crypto assets.
SEC’s SAB 121: A Complicated Obstacle for Crypto Custody Services
The Security and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121) has posed significant challenges for banks and financial institutions by mandating that they record clients’ crypto assets as liabilities on their balance sheets. This directive has been deemed inefficient and problematic by large banking entities, making the provision of crypto custody services burdensome.
Bipartisan Legislative Efforts and Presidential Veto
In an effort to nullify the constraints imposed by SAB 121, both the House and Senate passed a bipartisan Congressional Review Act resolution. However, this measure was vetoed by President Biden in May. Following the veto, a subsequent House vote held on July 11 aimed at overturning the veto fell short of the two-thirds majority needed, culminating in a 228-184 result, according to reports from the American Banker.
SAB 121’s Impact on Safe Custody: Voices from the Industry
Prominent figures in the financial sector, including the pro-crypto Chairman of the House Financial Services Committee, Patrick McHenry, have voiced concerns over SAB 121. McHenry highlighted that the guidance not only hampers safe custody of digital assets but also poses risks to the crypto ecosystem. In a recent statement, he emphasized that the SEC’s approach under SAB 121 could potentially harm consumers rather than safeguard them, contradicting the intended purpose of the directive.
Industry Pushback and SEC’s Response
Major financial organizations like the American Bankers Association, Bank Policy Institute, Financial Services Forum, and the Securities Industry and Financial Markets Association expressed their discontent with SAB 121. In a joint letter to the House, they described the guidance as a significant departure from established accounting practices, jeopardizing the industry’s ability to offer safe custody of digital assets to customers.
SEC’s Evolving Stance
In response to these growing concerns, the SEC has shown a willingness to adapt. According to a report by Bloomberg on July 11, the SEC is now allowing banks and financial institutions to implement risk mitigation measures to bypass the stringent accounting requirements of SAB 121. This new, more flexible stance could enable banks to continue offering crypto custody services without reflecting these assets as liabilities on their balance sheets, provided they safeguard client assets in scenarios of bankruptcy or failure.
Conclusion
The SEC’s initial strict enforcement of SAB 121 created substantial hurdles for banks looking to offer crypto custody services. However, recent developments suggest a shift towards a more accommodative approach, allowing institutions to navigate the regulations more effectively. Despite this softer stance, SAB 121 remains a contentious point within the industry, especially following the unsuccessful attempt to override the Presidential veto. Moving forward, the financial sector will need to closely monitor regulatory changes to adapt and manage the evolving landscape of digital asset custody.
