U.S. House Moves to Overturn SEC Rule Impacting Bank Crypto Custody Services

In a significant development yesterday, the U.S. House of Representatives passed a bipartisan resolution aimed at overturning the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121), which imposes stringent regulations on banks providing digital asset custody services. This move, backed by twenty-one Democrats alongside Republicans, marked a pivotal moment with a vote tally of 228 in favor and 182 against. However, for the resolution to fully nullify SAB 121, a similar endorsement by the Senate is required.

The essence of SAB 121 lies in its requirement for listed companies, including banks, to account for cryptocurrencies not only as assets but also as liabilities. This dual entry significantly differs from the traditional handling of custodial assets, which are not recorded on a bank’s balance sheet as they belong to clients. According to the Basel standards, banks must allocate a corresponding amount of capital for every dollar of cryptocurrency held under custody, making the provision of crypto custody services economically burdensome in the U.S. Consequently, most Bitcoin ETFs turn to specialized crypto custody services like Coinbase.

The resolution to overturn SAB 121 stems from substantial criticism. The Government Accountability Office (GAO) recommended a Congressional review, stating the SEC had sidestepped the regular rule-making procedures that require public commentary by categorizing the directive as staff guidance. House Financial Services Committee Chair, Patrick McHenry, criticized the SEC for not consulting with prudential regulators or Congress before implementing the rule.

SEC Commissioner Hester Pierce expressed concerns about the efficacy of SAB 121, noting that banks are arguably more capable of securely managing client assets due to their extensive experience with large-scale asset custody, compared to the relatively modest security measures employed by dedicated crypto custody firms.

Several prominent financial institutions and associations, including the American Bankers Association (ABA), the Bank Policy Institute, the Financial Services Forum, and the Securities Industry and Financial Markets Association (SIFMA), have voiced their opposition. They argue that SAB 121 deviates significantly from established practices for managing custodial assets and could undermine the industry’s ability to offer secure and reliable digital asset custody.

Despite the widespread support for rescinding SAB 121, some Democrats, led by Maxine Waters, the ranking member of the House Financial Services Committee, advocate for a more measured approach. Waters emphasized the broader implications of the resolution, suggesting that it does more than address specific concerns; it risks removing important safeguards designed to ensure companies can cover potential losses.

The debate over SAB 121 reflects broader tensions within financial regulatory frameworks concerning the integration of digital assets. The SEC’s reluctance to revise the bulletin or engage with other regulators has led proponents of the resolution to argue that passing it is essential to prevent regulators from bypassing the Administrative Procedure Act (APA) and imposing rules without due process.

As the Senate prepares to consider this resolution, the outcome could significantly impact the future of digital asset custody in the U.S., potentially reopening the doors for banks to play a more active role in the burgeoning cryptocurrency market. This decision will not only influence the operational strategies of financial institutions but could also shape the regulatory landscape for digital assets in the years to come.

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