In a significant development that could have far-reaching implications for the cryptocurrency industry, the U.S. Government Accountability Office (GAO) has issued a report declaring that the U.S. Securities and Exchange Commission (SEC) acted beyond its authority when it released the contentious “Staff Accounting Bulletin 121” (SAB 121) without proper congressional review. The GAO’s findings, published on Tuesday, have sparked debate and concern among stakeholders in the crypto space.
SAB 121, issued in 2022, introduced a guideline stating that financial firms holding customers’ cryptocurrency assets must record them on their balance sheets and maintain capital reserves against them. This move has raised alarm bells within the industry, with critics arguing that it threatens the ability of regulated banks to act as crypto custodians and treats cryptocurrency holdings differently from other assets.
The GAO’s report contends that the SEC’s issuance of SAB 121 should have followed a different process, involving submission to Congress before implementation, in accordance with federal rulemaking procedures. The GAO argues that SAB 121 qualifies as a “rule” under the Administrative Procedure Act, making it subject to the Congressional Review Act’s submission requirement.
The Congressional Review Act allows lawmakers an opportunity to review and potentially reject new federal rules once they are submitted for review. While it is not yet clear how the submission process will unfold, it is likely that SAB 121 will now be presented to Congress for evaluation.
In response to the GAO’s findings, the SEC released a statement asserting that the GAO’s opinion does not impact SAB 121’s current status as nonbinding SEC policy. However, this development is seen as a setback by many within the crypto industry.
Nathan McCauley, CEO and co-founder of Anchorage Digital Bank, characterized the GAO’s findings as an acknowledgment of SAB 121 being “regulation under the guise of staff guidance.” He expressed concern that the bulletin hinders SEC-reporting banks’ ability to offer custodial services for digital assets at scale.
SEC Commissioner Hester Peirce had previously voiced her dissent regarding the commission’s decision on SAB 121, criticizing it as an inefficient approach to regulating cryptocurrencies. The SEC had argued that the accounting policy did not qualify as a rule because it did not represent an “agency statement” of “future effect.”
The fate of SAB 121 now rests in the hands of Congress, with the cryptocurrency industry closely watching to see how lawmakers will respond. The GAO’s report has highlighted the need for a comprehensive and transparent approach to regulating cryptocurrency assets, one that considers the unique challenges and opportunities presented by this rapidly evolving sector.
Digital Assets Desk