On Monday, a group of more than 40 Republican lawmakers sent a letter to U.S. Securities and Exchange Commission Chairman Gary Gensler, once again urging the agency to rescind its controversial cryptocurrency custody rule.
THE letterled by House Financial Services Committee Chairman Patrick McHenry, Sen. Cynthia Lummis and 40 other bipartisan lawmakers, comes after Congress passed a bipartisan repeal of Staff Accounting Bulletin No. 121 (SAB 121), which President Joe Biden then vetoed it..
The SEC’s lack of clearer rules on cryptocurrencies has become a central issue among critics who say the agency is pursuing a regulatory regime through litigation. SAB121, meanwhile, has come under fire since its implementation in March 2022, with critics saying it disrupts traditional accounting standards and puts unnecessary pressure on financial institutions.
Lawmakers also argue that SAB 121, which requires cryptocurrency custodians to recognize digital assets as liabilities on their balance sheets, could increase risks for consumers, weaken financial innovation and discourage banks from offering custody services for cryptocurrencies.
SAB 121 “departs from established accounting standards, would not accurately reflect the depository’s underlying legal and economic obligations, and would expose consumers to a greater risk of loss,” the politicians wrote in their letter.
The rule was originally designed to address the risks associated with holding digital assets, but critics say it has the opposite effect.
They argue that this stifles innovation by pushing custody of cryptocurrencies into the hands of non-bank entities, which they say could lead to more concentrated risks in the sector.
Critics of SAB 121 have also accused the SEC of circumventing the Administrative Procedure Act, which requires a formal notice and comment period for new regulations.
The letter highlighted the lack of transparency surrounding the implementation of SAB 121, saying the SEC may have worked privately with some institutions to help them avoid compliance. The regulator did not immediately respond to a request for comment.
Although President Biden vetoed a previous resolution to repeal SAB 121 in June, citing concerns about financial stability and investor protection, the issue remains controversial.
The U.S. House of Representatives attempted to override President Biden’s veto on July 10, 2024, but failed to reach the necessary two-thirds supermajority.
The vote saw 207 Republicans and 21 Democrats vote in favor of repeal, falling short of the required threshold. The same voting pattern was seen in May when the bill was first voted on.
Ultimately, 183 Democrats voted against the measure, preventing the law from being eliminated and representing a major setback for the repeal effort. That further angered those who already disagreed with the regulator’s perceived stance toward the industry.
At a recent hearing in federal court, a panel of judges skewered SEC lawyers over the agency’s refusal to issue specific rules for crypto tokens, raising concerns about the SEC’s long-standing approach of “regulating through enforcement” through sporadic prosecutions.
The judges expressed frustration with the SEC’s failure to clarify whether major cryptocurrencies like Bitcoin and Ethereum fall under securities regulations.
In a separate matter, cryptocurrency exchange Kraken also responded to an SEC lawsuit in demanding a jury trialclaiming that the SEC has failed to provide clear regulatory guidance on which crypto assets qualify as securities.
Edited by Sebastian Sinclair
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