Congress Pushes SEC for Bank Bitcoin Custody; SAB 121 Critique

Republican lawmakers in both the House and Senate have made a notable effort to promote a more advantageous regulatory landscape for Bitcoin (BTC) and crypto asset custodians.

In a correspondence directed to US Securities and Exchange Commission (SEC) Chair Gary Gensler, a group of pro-crypto legislators, including House Financial Services Chair Patrick McHenry and Senator Cynthia Lummis, has called on the SEC to eliminate its accounting directive for digital assets, referred to as Staff Accounting Bulletin 121 (SAB 121).

Growing Opposition to SEC’s SAB 121

The letter, released on Monday and backed by forty-two additional prominent members of Congress, highlights that there is “overwhelming” bipartisan support from Congress for rejecting SAB 121 through the enactment of H.J.Res.109.

This resolution requests the SEC to reevaluate its position on the bulletin, which mandates that custodians must recognize a liability and maintain a requisite offset on their balance sheets, assessed at the fair value of the customer’s digital assets.

Lawmakers contend that this method diverges from standard accounting practices and does not accurately portray the legal and financial responsibilities of custodians, thereby potentially increasing consumer risk.

A primary criticism of SAB 121 is that it was introduced without sufficient engagement with prudential regulators, resulting in “confusion and inconsistencies” in how it is applied across financial institutions.

The lawmakers argue that the SEC has bypassed the required notice and comment rulemaking process specified by the Administrative Procedure Act (APA) by rolling out this rule as staff guidance.

They claim that the SEC’s Office of Chief Accountant (OCA) has only intensified the issue by collaborating with select institutions to sidestep the balance sheet reporting requirements on an individual basis, which undermines the transparency and consistency the SEC professes to uphold.

BNY Mellon’s Acceptance as Bitcoin Custodian May Indicate a Change?

The timing of this letter is crucial, appearing just four days after the SEC granted the Bank of New York (BNY) Mellon an exemption from SAB 121, making it the inaugural bank to receive such clearance.

This exemption could pave the way for other financial institutions to pursue similar exemptions, indicating a potential change in the SEC’s stance regarding traditional banks entering the cryptocurrency sector.

Michael Novogratz, CEO of Galaxy Digital, suggested that this decision by the SEC might motivate more banks to explore digital asset engagement, provided the regulatory framework becomes more favorable.

Nonetheless, the pro-crypto legislators are urging the SEC to work with Congress to guarantee that Americans have access to secure and reliable custodial services for Bitcoin and other digital assets.

They argue that by abolishing SAB 121, the SEC would not only align itself with accepted accounting standards but also cultivate a more encouraging environment for traditional financial entities aiming to enter the cryptocurrency market.