U.S. lawmakers argue SEC accounting policy undermines safe crypto custody

• Two Republican lawmakers are questioning policies governing how financial firms handle crypto accounting in the country.
• In their letter, they asked the banking agencies about whatever interactions they had with the SEC on this issue.

Two Republican lawmakers who have been central to the United States Congress’ continuing efforts to regulate cryptocurrency are questioning policies governing how financial firms handle crypto accounting in the country.

U.S. Rep. Patrick McHenry (R-N.C.), chairman of the House Financial Services Committee, and Sen. Cynthia Lummis (R-Wyo.), who has authored crypto legislation, yesterday (2 March) sent a letter to several banking agencies asking how they’re dealing with a controversial Securities and Exchange Commission note asking financial institutions to keep customers’ crypto holdings on their own balance sheets.

The letter to the Federal Reserve and other U.S. banking agencies criticized the Staff Accounting Bulletin (SAB) 121, SEC’s move last year.

Since it would force regulated banks to reject crypto custody as something that comes with significant capital requirements, the measure could deny millions of Americans access to safe and secure custodial arrangements for digital assets.

In their letter, the lawmakers argued that a recent decision in the Celsius bankruptcy (which classified all of Celsius’ customers as unsecured creditors and thus at the back of the line to recover their assets) highlights the legal risk of effectively forcing customer custodial assets to be placed on the balance sheet.

The letter asked the banking agencies about whatever interactions they had with the SEC on this issue, as well as whether the SEC’s position conflicts with their own policies.

SEC’s actions being questioned

Fed Chair Jerome Powell already stated last year that the central bank was evaluating the SEC’s directive, which changes longstanding practice for digital assets that customer assets would be kept off a financial firm’s balance sheet.

In June last year, five Republican senators, including Lummis, sent a letter to the SEC expressing their concern that the bulletin was a regulation disguised as staff guidance and violated the Administrative Procedure Act.

SEC commissioner Hester Peirce expressed similar concerns in March 2022, shortly after the bulletin was released, noting that it was the manner in which the change was made rather than the accounting determination itself that she objected to.