Republican lawmakers have strongly requested that the U.S. Securities and Exchange Commission repeal a controversial rule for banks that deal with crypto.
Yesterday, Sept. 23, a group of more than 40 members of Congress sent signed letters to the heads of four major United States regulators. The letters demand that the regulators communicate across agencies about a particularly controversial SEC bulletin from 2022, known as SAB 121.
One of the letters was addressed to SEC Chair Gary Gensler — just a day before Gensler would join all of his fellow SEC commissioners in a U.S. House Financial Services Committee hearing on the agency’s oversight. The timing and the message were clear — ahead of today’s broader SEC oversight hearing, the letter has a single focus for the SEC in particular: to “urge” Chair Gensler to repeal Staff Accounting Bulletin No. 121.
The Chairman of the Fed, the FDIC Chair, and the Acting Comptroller of the Currency also all received letters about SAB 121 from the members of Congress.
The letters’ authors include House Financial Services Committee Chairman Patrick McHenry and crypto advocate Senator Cynthia Lummis. Among the letters’ signatories are Republicans from the House Financial Services Committee and the Senate Banking, Housing, and Urban Affairs Committee.
The letter addressed to SEC Chair Gensler makes clear and bold claims that by issuing SAB 121, the SEC not only twisted the rules for issuing its guidance, but that with SAB 121, the agency is actually hindering 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 that was issued in April 2022. Per the SEC website, the bulletin does not represent official SEC guidelines or rules, but rather “staff interpretations.” The document makes it clear that the SEC considers custody of crypto particularly high-risk, compared with other assets. Given that risk, the agency argues in the bulletin that there should be specific rules for U.S. institutions that custody crypto.
The main guidance laid out in SAB 121 is, firstly, that any U.S.-regulated bank that offers crypto custody must reflect the cryptocurrency as a liability on its balance sheet. Secondly, as yesterday’s letter to Gensler explains, the bank must also “hold a corresponding offset on their balance sheets, measured at the fair value of the customer’s digital assets.” The letter continues with a scathing critique aimed at the implications of the 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” in SAB 121 also affects accounting expenses for banks — as it differs from their standard process — and thus arguably deters them from providing crypto custody services at all.
The result is particularly crippling for U.S. crypto firms, which require a banking parter that deals with cryptocurrency. As the number of banks willing to work with crypto companies decreases, U.S.-based crypto startups are arguably also being deterred from doing business in the U.S., thereby weakening the potential of the U.S. crypto industry’s development.
SAB 121 drew criticism from crypto and Congress
In yesterday’s letter to SEC Chairman Gensler, the members of Congress summarize their criticisms of the bulletin, echoing those of the wider crypto industry. The letter accuses the SEC of bureaucratic trickery, claiming that the regulator, having issued this rule under the guise of a “staff recommendation,” was able to bypass the notice and comment process required by the Administrative Procedure Act:
“SAB 121 was issued without consulting any of the prudential regulators.”
Moreover, the letter claims that effectively requiring U.S. financial institutions to do liability reporting for crypto custody specifically “deviates from established accounting standards.” Ultimately, the lawmakers argue, discouraging U.S. banks from custodying crypto and working with crypto firms — given the high cost required to follow the specific rules of SAB 121 — ends up putting U.S. consumers at risk.
The letter’s authors also note that instead of admitting that the bulletin was a mistake and repealing it, the SEC’s Office of the Chief Accountant has invited more backlash by working with certain institutions to avoid balance sheet reporting requirements:
“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 revise SAB 121 have failed
Back in February, four industry organizations asked the SEC to soften the document’s provisions. The agency’s commissioner, Hester Peirce, called the bulletin and related management recommendations “a noxious weed.”
In May, the Senate passed a resolution to repeal SAB 121. The bill passed in the House of Representatives as well. But despite the a bipartisan vote in Congress, in June, President Joe Biden vetoed the bill that would rescind SAB 121, to the crypto community’s dismay.
The House attempted to override the veto on July 10 but fell 60 votes short of the coveted two-thirds majority required to do so.
The SEC introduces new rules of the game
Citing an SEC source familiar with the matter, Bloomberg previously reported that SEC staff had begun distributing recommendations among institutions and brokers on how to get around SAB 121 by avoiding reflecting cryptocurrencies as liabilities on their balance sheets.
Then an exciting twist was revealed this week: Bank of New York Mellon, the largest custody bank in the U.S., was reportedly granted an exemption from SAB 121. The report came from a Wyoming legislative hearing last week. Politicians were quick to criticize the SEC’s Office of the Chief Accountant, accusing it of playing favorites.
Bitcoin bull Michael Saylor, the founder of MicroStrategy, also hinted that one or more mainstream banks could soon get the green light to store cryptocurrencies.
Is Operation Choke Point 2.0 coming to an end?
For years, under Biden’s presidency, the crypto industry has been calling out U.S. regulators for pursuing what’s broadly known in the industry as Operation Choke Point 2.0 — a term coined by crypto VC and industry figure Nic Carter in 2022 to refer to the U.S. government’s unofficial attack on the crypto industry. The broad “operation” consists of a series of perhaps seemingly small policies, guidelines and rules — such as SAB 121 — that critics argue systematically deter banks from dealing with cryptocurrencies.
While traditional financial institutions in the U.S. are not openly banned from dealing with cryptocurrencies or crypto companies, the policies that make up Operation Choke Point 2.0 effectively discourage banks and other financial institutions from touching crypto. As a result of these policies, several banks that primarily dealt with digital assets — most notably Signature Bank and Silvergate Bank — have ended up being forced to shutter their businesses.
The rumors about the Bank of New York Mellon’s exemption and numerous calls for a repeal of SAB 121 — yesterday’s letters being the most recent example — may mean a softening of federal measures against cryptocurrencies in the U.S. is gaining momentum.