A bill aiming to reverse the Securities and Exchange Commission’s bulletin regarding cryptocurrency custodian accounting received bipartisan support as twenty-one Democrats joined Republicans in voting in favor of it. The SEC’s bulletin required firms to classify digital assets held by customers as liabilities.
Unsurprisingly, the regulations imposed by the Securities and Exchange Commission were met with disapproval from financial institutions and influential figures who support the widespread adoption of cryptocurrencies. The Commission’s bulletin sparked discussions about the regulatory burdens on crypto’s growth, ultimately leading to the bill in the House of Representatives.
Issued in 2022, the rule mandated financial institutions to treat customer cryptocurrency holdings as liabilities. The House appeared divided on the matter, with a majority, including Patrick Henry, the Chair of the House Financial Services Committee, criticizing the Securities and Exchange Commission’s control over the cryptocurrency industry. On the other hand, some representatives advocated for stricter laws to promote transparency within the industry as a whole.
The SEC’s Crypto Custody Rule, as outlined in Staff Accounting Bulletin 121, has faced backlash from crypto businesses, financial institutions, and even the US president, who discouraged Democrats from passing the bill and vowed to veto it if it reached his desk.
The SEC’s memo, released in 2022, requires custodians of cryptocurrencies and other digital assets to categorize them as liabilities in their accounting records. This practice of listing digital assets as liabilities on balance sheets has faced significant criticism, with many arguing that it would deter financial institutions from supporting cryptocurrency businesses due to excessively high capital requirements.
Banks and other financial institutions feel hindered by the SEC’s ongoing enforcement of this custody rule. A group of banks has directly expressed their concerns to SEC Chair Gary Gensler, pointing out the inability of banks to act as custodians for ETPs that have already attracted billions of dollars in investments since their approval.
Some have argued that Staff Accounting Bulletin 121 was implemented unlawfully and that the SEC lacks the authority to enforce it without following the proper channels. The resolution to repeal this bulletin has already passed the House of Representatives and now awaits approval from the Senate before it can reach the President, who has stated his intention to veto the bill if it reaches his desk.