US Politicians Pressure SEC to Revoke Controversial Cryptocurrency Custody Rule

Calls to Repeal SAB 121 by U.S. Republicans

In a significant political move, over 40 Republican lawmakers in the United States have rallied to urge the Securities and Exchange Commission (SEC) to revoke its controversial Staff Accounting Bulletin No. 121 (SAB 121) rule. Recent developments surrounding the repeal of this rule have sparked intense discussions and debates in the financial sector.

Understanding SAB 121

SAB 121 was introduced to amend custody rules for cryptocurrencies, a decision that has been met with considerable criticism. Opponents argue that this rule undermines consumer protections and stifles innovation in the financial markets. Specifically, the rule requires SEC-reporting entities to list cryptocurrency holdings as liabilities on their balance sheets, thus altering how these financial assets are recognized and reported.

Concerns from Lawmakers

In a letter dated September 23, House Financial Services Committee Chair Patrick McHenry, Senator Cynthia Lummis, and their supporters expressed strong concerns regarding the implications of SAB 121. They addressed SEC Chair Gary Gensler, arguing that the rule was enacted without adequate consultation with industry experts and diverges from established accounting standards.

Consumer Protection Risks

The group claims that SAB 121 does not accurately reflect the economic and legal obligations of custodians involved in cryptocurrency transactions. This lack of clear standards could increase the risk of losses for consumers engaging with these financial products.

Procedural Missteps

Additionally, the Republicans criticized the SEC for issuing the rule under the auspices of staff guidance, thereby bypassing the necessary notice and comment rulemaking process dictated by the Administrative Procedure Act. In their argument, they maintain that revoking SAB 121 is a necessary and justified step for the SEC.

Political Background

This letter was delivered in the lead-up to the House Financial Services Committee's hearing with the SEC set for September 24. Lawmakers also raised concerns regarding the SEC’s Office of Chief Accountant, suggesting that it has been collaborating with specific institutions to circumvent balance sheet reporting requirements, potentially fostering inconsistency in reporting practices across institutions.

Exemptions and Controversies

An alarming allegation noted in the discussions is that the Bank of New York — the largest custodian bank in the U.S. — reportedly obtained an exemption from SAB 121, as highlighted in a hearing in the Wyoming legislature on September 17. Such exemptions could contribute to perceived preferential treatment for large financial institutions, further complicating the landscape of compliance.

Bipartisan Challenges

Support for the repeal predominantly comes from Republicans on the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs. Notable signatories of the letter include House Representatives French Hill, Tom Emmer, along with Senators Bill Hagerty and Tim Scott.

Previous Legislative Efforts

This recent push follows a repeal bill that gained bipartisan support but was ultimately vetoed by President Joe Biden in June. After this veto, the House was unable to garner enough votes to overturn the decision, falling short by 60 votes of the two-thirds majority required to move the repeal to the Senate.

Conclusion

The ongoing discussions surrounding SAB 121 reflect deep divisions in U.S. financial policy related to cryptocurrencies. As lawmakers continue to push for repeal, the implications for consumer protection and market innovation remain a critical point of contention in the broader narrative of digital currency regulation.