Lawmakers Probe Whether SEC Guidance on Digital Assets ‘Undermined’ Banking Regulators

Four lawmakers sent letters to the heads of financial regulators, asking for information about the development of the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) No. 121.

The lawmakers want to assess whether the SEC “undermined banking regulators” by issuing SAB 121, which “upends bank custody rules for digital assets,” according to a Tuesday (Sept. 24) press release issued by the House Financial Services Committee (HFSC).

The letters were sent by Rep. Patrick McHenry of North Carolina, Rep. Bill Huizenga of Michigan, Rep. French Hill of Arkansas and Rep. Andy Barr of Kentucky. They were addressed to the heads of the Federal Reserve Board, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the SEC, according to the release.

In the letter to SEC Chair Gary Gensler, the lawmakers considered whether the SEC’s publication of SAB 121 disrupted an effort by other agencies to create an Interagency Statement on Crypto-Asset Custody Services and a related request for information (RFI) about crypto-asset custody ancillary activities, per the release.

“Shortly after SAB 121’s publication, emails between agencies’ employees suggest that the document contained ‘various ambiguities’ and left open questions regarding its scope,” the letter said. “It is unclear if any communications occurred between the SEC and any of the prudential regulators to discuss the regulatory treatment of digital asset custodial services prior to SAB 121’s publication. It also remains unclear what impact SAB 121’s publication had on the interagency workstream, which was intended to include both an Interagency Statement as well as an RFI. Ultimately, neither document was published despite the considerable time and resources dedicated to the initiative.”

It was reported in September 2022 that the accounting guidance from the SEC was holding many banks back from offering their clients cryptocurrency products and services.

The accounting guidance requires that public companies holding crypto assets for clients count them as liabilities on the balance sheets, making it uneconomical for banks to offer that service.

The SEC said in its advisory that this practice is necessary because crypto has “technological, legal and regulatory risks.”

In June, President Joe Biden vetoed a congressional resolution that challenged SAB 121 and aimed to overturn the SEC’s current stance on banks and crypto.

“SAB 121 reflects considered technical SEC staff views regarding the accounting obligations of certain firms that safeguard crypto assets,” Biden said at the time in a statement.