Republican lawmakers have made a strong appeal for the U.S. Securities and Exchange Commission to withdraw a contentious regulation concerning banks that engage with cryptocurrency.
On September 23, a coalition of over 40 members of Congress dispatched signed letters to the leaders of four key U.S. regulators. These letters urge the regulators to coordinate across agencies regarding an especially contentious SEC bulletin from 2022, identified as SAB 121.
One of the letters was directed to SEC Chair Gary Gensler — a day prior to Gensler joining his fellow SEC commissioners in a U.S. House Financial Services Committee hearing concerning the agency’s oversight. The timing and content were unmistakable — leading up to today’s broader SEC oversight hearing, the letter specifically aims to “urge” Chair Gensler to revoke Staff Accounting Bulletin No. 121.
The letters were also sent to the Chairman of the Fed, the FDIC Chair, and the Acting Comptroller of the Currency regarding SAB 121.
Among the authors of the letters are House Financial Services Committee Chairman Patrick McHenry and crypto supporter Senator Cynthia Lummis. The signatories include Republicans from both the House Financial Services Committee and the Senate Banking, Housing, and Urban Affairs Committee.
The correspondence addressed to SEC Chair Gensler makes definitive claims, stating that by issuing SAB 121, the SEC not only distorted the procedures for issuing its guidance but that SAB 121 is actively obstructing consumer protection and financial innovation in the U.S.:
“We urge you to rescind SAB 121 and work with Congress to ensure Americans have access to safe and secure custodial arrangements for digital assets.”
What is SAB 121?
SAB 121 is an SEC staff bulletin released in April 2022. According to the SEC’s website, the bulletin does not constitute official SEC guidelines or rules, but rather “staff interpretations.” The document indicates that the SEC regards the custody of cryptocurrency as particularly high-risk compared to other assets. In light of this risk, the agency argues in the bulletin that there should be specific regulations for U.S. institutions that manage crypto custody.
The primary guidance set forth in SAB 121 includes, firstly, that any U.S.-regulated bank offering crypto custody must record the cryptocurrency as a liability on its balance sheet. Secondly, as outlined in the letter to Gensler, the bank is also required to “hold a corresponding offset on their balance sheets, measured at the fair value of the customer’s digital assets.” The letter continues with a harsh critique of the implications of this staff interpretation:
“This accounting approach, which deviates from established accounting standards, would fail to accurately reflect the underlying legal and economic obligations of the custodian, and place consumers at a greater risk of loss.”
The “interpretive guidance” contained in SAB 121 also impacts banks’ accounting expenses — as it diverges from their standard procedures — and thus arguably deters them from offering crypto custody services completely.
This development is particularly detrimental for U.S. crypto firms, which rely on banking partners that engage with cryptocurrency. As the number of banks willing to collaborate with crypto companies diminishes, U.S.-based crypto startups are arguably being discouraged from doing business in the U.S., thereby stunting the growth potential of the U.S. crypto industry.
SAB 121 has faced criticism from both the crypto sector and Congress.
In the recent letter to SEC Chairman Gensler, the congressional members encapsulate their critiques of the bulletin, mirroring those of the broader crypto community. The letter accuses the SEC of bureaucratic subterfuge, asserting that the regulator, having issued this rule masquerading as a “staff recommendation,” was able to sidestep the notice and comment process mandated by the Administrative Procedure Act:
“SAB 121 was issued without consulting any of the prudential regulators.”
Furthermore, the letter asserts that effectively mandating U.S. financial institutions to perform liability reporting for crypto custody specifically “deviates from established accounting standards.” Ultimately, lawmakers contend that discouraging U.S. banks from managing crypto and collaborating with crypto firms — due to the high costs associated with adhering to SAB 121’s specific conditions — ultimately endangers U.S. consumers.
The authors of the letter also highlight that instead of conceding the bulletin was erroneous and rescinding it, the SEC’s Office of the Chief Accountant has exacerbated backlash by collaborating with certain institutions to circumvent balance sheet reporting obligations:
“These consultations, completed on a case-by-case and confidential basis, do not provide the transparency or certainty needed to ensure SAB 121’s requirements are consistently applied across different institutions.”
Previous attempts to amend SAB 121 have met with failure.
Back in February, four industry organizations urged the SEC to alleviate the restrictions outlined in the document. Commissioner Hester Peirce referred to the bulletin and associated management recommendations as “a noxious weed.”
In May, the Senate passed a resolution aimed at repealing SAB 121. The House of Representatives also passed the bill. Yet, despite bipartisan support in Congress, President Joe Biden vetoed the bill in June, disappointing the crypto community.
The House made an attempt to override the veto on July 10 but came 60 votes short of achieving the necessary two-thirds majority.
The SEC introduces new rules of engagement.
According to a source from the SEC familiar with the matter, as reported by Bloomberg, SEC staff began providing recommendations to institutions and brokers on how to circumvent SAB 121 by avoiding the requirement to reflect cryptocurrencies as liabilities on their balance sheets.
An interesting development surfaced this week: Bank of New York Mellon, the largest custody bank in the U.S., was reportedly granted an exemption from SAB 121, according to a legislative hearing in Wyoming last week. Politicians quickly criticized the SEC’s Office of the Chief Accountant, accusing it of favoritism.
Bitcoin advocate Michael Saylor, the founder of MicroStrategy, also suggested that one or more mainstream banks might soon receive approval to store cryptocurrencies.
Is Operation Choke Point 2.0 nearing its conclusion?
For years, under President Biden’s administration, the crypto industry has been vocal about U.S. regulators allegedly pursuing what is informally termed Operation Choke Point 2.0 — a phrase coined by crypto venture capitalist Nic Carter in 2022 to characterize the U.S. government’s unofficial assault on the crypto sector. This broad “operation” comprises a range of seemingly minor policies, guidelines, and rules — including SAB 121 — that critics argue systematically dissuade banks from engaging with cryptocurrencies.
Even though traditional financial institutions in the U.S. aren’t explicitly prohibited from dealing with cryptocurrencies or crypto enterprises, the policies constituting Operation Choke Point 2.0 effectively deter banks and other financial entities from engaging with crypto. Consequently, several banks primarily focused on digital assets — notably Signature Bank and Silvergate Bank — have had to close their doors.
The rumors regarding Bank of New York Mellon’s exemption and numerous calls for the repeal of SAB 121 — with yesterday’s letters being the latest instance — could signal a potential easing of federal restrictions against cryptocurrencies in the U.S. gaining traction.
