SEC’s cryptocurrency bulletin under question, more inside

• The U.S. Government accused the SEC of neglecting a crucial step in custodial obligations.
• This situation has sparked a debate on whether the bulletin should be categorized as a “rule.”

On 31 October, the U.S. Government Accountability Office voiced its concerns regarding a cryptocurrency-related bulletin issued by the U.S. Securities and Exchange Commission (SEC).

Notably, the accountability office accused the SEC of neglecting a crucial step when providing guidance concerning the accounting and disclosure of custodial obligations. This was related to safeguarding users’ cryptocurrency holdings.

The contention primarily revolves around the failure of the SEC to submit mandatory reports to Congress as per the Congressional Review Act (CRA) and the Comptroller General before implementing any rules.

This situation has sparked a debate over whether the bulletin should be categorized as a “rule.” The accountability office argued that the bulletin meets specific definitions of a rule according to the Administrative Procedure Act (APA), thus necessitating the submission of requisite reports.

In response, the SEC contended that the bulletin does not qualify as a rule since it lacks the characteristics of an agency action or a binding agency statement.

Tussle over regulatory classification

The repercussions of this dispute remain uncertain. It also raises questions about the accountability office’s enforcement authority as an independent agency within the U.S. legislative branch.

The genesis of this controversy dates back to March 24. The SEC published the relevant guidance in Staff Accounting Bulletin No. 121 (Bulletin).

This bulletin recommended that companies should account for safeguarded cryptocurrencies as a liability on their balance sheets at fair values, along with corresponding assets.

However, this shift from traditional practices sparked controversy among Republican lawmakers, who voiced concerns about its implications. They argued that this change contradicted established banking practices, particularly related to the off-balance sheet handling of custody assets.

One Congressman, Andy Barr (R-Ky.), expressed apprehensions that such alterations might deter banks from providing digital asset custody services.

SEC Chair Gary Gensler defended the guidance. He emphasized the importance of both banks and public companies incorporating relevant information regarding cryptocurrencies on their balance sheets.

The SEC has come under a wave of criticism from many for its handling of crypto companies without clear regulations. Hester Peirce, a commissioner at the SEC, criticized the SEC’s handling of charges against the crypto startup LBRY.

Peirce expressed her concerns about the lack of clarity and a clear path for companies like LBRY to register their functional token offerings. For the uninitiated, LBRY recently announced its shutdown after the SEC accused the firm of  selling unregistered securities.