April 22, 2024

House Financial Services Committee Advances Resolution to Overturn SEC’s Crypto Custody Rule

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The House Financial Services Committee has approved a resolution rejecting the Securities and Exchange Commission’s (SEC) accounting rule preventing banks from offering digital asset custody services. The resolution, proposed by members of Congress from both parties, secured a 31-20 vote in favor. If approved by the full House and Senate, the resolution will overturn the SEC’s rule.

The accounting rule in question, known as Staff Accounting Bulletin (SAB) 121, mandates companies, including banks, to include digital assets held in custody on their balance sheets as both assets and liabilities. The rule faced criticism for making crypto custody prohibitively expensive for banks, impacting their balance sheets and overall operations.

Proponents of the resolution argued that SAB 121 forces banks to choose between offering crypto custody and inflating their balance sheets or staying out of the market altogether. They contended that the SEC did not consult adequately with bank regulators, and the broad definition of digital assets covers all tokenized assets, not just cryptocurrencies.

Opponents of the resolution argued that it prevents the SEC from providing future guidance in the crypto custody space. Some suggested that the rule was not binding and that disclosure of digital assets on balance sheets is crucial, especially considering the risks and fraud in the crypto space.

The impact of SAB 121 has been notable, particularly on Bitcoin exchange-traded funds (ETFs). Cryptocurrencies supporting 11 Bitcoin ETFs are not held in custody by regulated banks, raising concentration risks and potential security concerns.

The resolution’s passage could have repercussions on the SEC’s ability to issue similar rules in the future. Critics expressed concerns about a potential chilling effect on the SEC’s ability to provide accounting and legal guidance on various issues. However, supporters argued that the resolution was necessary to address the challenges posed by SAB 121 to the banking industry and its competitiveness in the international arena.

The full House and Senate will need to approve the resolution for it to become binding. The SEC has faced ongoing pressure to reconsider and amend SAB 121, which has been in effect for almost two years. The industry, along with Congress and the Government Accountability Office, has actively sought changes to the rule, including moving disclosures to footnotes and excluding tokenized securities. The ongoing discussions provide an opportunity for potential amendments before the resolution’s final approval.

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