Congressional Republicans are not happy with an SEC effort to rein in crypto platforms
WASHINGTON – Congress’s biggest cryptocurrency advocates are pushing back against a Securities and Exchange Commission bulletin that would affect how banks and financial institutions account for digital assets.
In a letter sent to the SEC on Thursday, House Financial Services Committee Chairman Patrick McHenry, RN.C., and Sen. Cynthia Lummis, R-Wyo., who are each working on legislation to regulate the cryptocurrency industry, said they have “concerns” regarding a staff accounting bulletin known as SAB 121.
The question is how crypto platforms calculate risk. Crypto platforms tend not to include their customers’ crypto assets when calculating how much risk their business faces. SAB 121 effectively tells them that they should include these customer assets in the risk analysis.
The letter comes as the SEC and lawmakers continue to grapple with how to effectively regulate cryptocurrencies and other digital assets, a topic made more urgent by the high-profile collapse of many major crypto platforms, including Celsius and FTX. Many customers have either lost money or had their assets frozen while the platforms attempt to sort out their bankruptcies.
“A recent ruling in the Celsius bankruptcy, which classified all of Celsius’ customers as unsecured creditors and therefore at the back of the line to recover their assets, highlights the legal risk of effectively forcing customer custody assets to be placed on the balance sheet,” the lawmakers wrote .
In January, the Biden administration asked Congress to “expand regulators’ authority to prevent misappropriation of clients’ assets — which harm investors and distort prices — and to reduce conflicts of interest.”
The SEC is considered the most likely government entity to regulate digital assets and has grappled with questions such as whether cryptocurrencies should be considered securities. SEC Chairman Gary Gensler has said he believes they are.
How the SEC regulates cryptocurrencies will have major consequences for customers and the many companies that have grown rapidly in recent years around the crypto industry. The industry has also leaned into lobbying.
SAB 121, issued by the SEC’s Office of the Comptroller last March, marks the first time digital asset platforms have received instructions on how to account for the volatile values of cryptocurrencies.
Such SEC bulletins are relatively rare (only three have been issued since 2019) and are issued by staff to outline their views on how companies should handle certain accounting issues. In August, Gensler defended SAB 121 as a standard part of SEC operations.
Lawmakers are concerned that this will create greater risk for consumers and increase compliance costs for financial institutions. Since the bulletin was issued, the SEC received pushback from both banks and cryptocurrency companies.
“Since SAB 121 purports to require banks, credit unions and other financial institutions to effectively place digital assets on their balance sheets, it will trigger a massive capital requirement. This in turn will likely prevent these prudentially regulated entities from engaging in digital assets,” they wrote.
In January, McHenry established the first-ever congressional panel focused solely on cryptocurrency and digital assets. The Subcommittee on Digital Assets, Financial Technology and Inclusion, under the umbrella of the Financial Services Committee, will be chaired by another leading House Republican on the matter, Rep. French Hill, R-Ark.
Lummis, who last June unveiled expansive legislation to regulate the crypto industry with Sen. Kirsten Gillibrand, DN.Y., plans to reintroduce the Responsible Financial Innovation Act sometime in April, a spokesperson said.
