Republicans ask SEC to rescind ‘disastrous’ SAB 121, denounce crypto regulatory confusion

A group of Republican lawmakers, led by Representative Patrick McHenry and Senator Cynthia Lummis, have expressed concern over the Securities and Exchange Commission’s (SEC) approach to regulating cryptocurrency custody.

In a letter to SEC Chairman Gary Gensler, the lawmakers demanded the agency “rescind” its Staff Accounting Bulletin No. 121 (SAB 121).

Criticism of SAB 121

The letter, shared by Fox reporter Eleanor Terrett via an X post, highlights several problems with SAB 121. Republicans say the SEC issued the guidance without consulting key regulators or following the formal drafting process of rules, causing confusion and exposing consumers to greater risks.

The rule requires digital asset custodians to recognize a liability and have corresponding compensation on their balance sheets, valued at the fair market price of their crypto. This method departs from traditional accounting practices and could put consumers at greater risk by inaccurately reflecting the legal and financial obligations of custodians.

Overturning SAB 121 is the only appropriate action and within the SEC’s authority. There is ample precedent for reviewing a staff accounting bulletin.

The letter also cites a decision by the Government Accountability Office (GAO), which ruled that SAB 121 qualifies as a “rule” under the Congressional Review Act, meaning it should have been subject to to the formal notice and comment process under the Administrative Procedure Act. (APA). Instead, the regulatory body skipped that process by framing it as a staff orientation.

Offers behind closed doors

GOP lawmakers also drew attention to confidential consultations between SEC staff and select financial institutions, where exemptions from reporting requirements were granted on a case-by-case basis.

Terrett addressed this in a separate post in which he questioned SEC commissioners for allowing accounting staff to “pick winners and losers in the crypto custody space” while bypassing the APA and the official rulemaking process .

One of the beneficiaries of this treatment is BNY Mellon, which has been identified as the first bank to receive an exemption from the rule. During a public hearing in Wyoming, Chris Land, general counsel to Senator Lummis, revealed that the SEC had allowed the financial institution to bypass some of the more onerous requirements of the bulletin.

In 2022, the bank started accepting crypto deposits after approval from the relevant authorities. However, as has been the case for players in the crypto custody space, complying with the accounting requirements contained in SAB 121 proved onerous, even as BNY sought to make further progress in the crypto market.

“BNY is looking to get more involved in the crypto custody business,” Land said. “They had some issues with SAB 121, and apparently the SEC has given them some kind of variance to move forward.”

Legislators seem to have a problem with this act of selecting who gets to avoid reporting balance sheet requirements. They say it provides no transparency or assurance that SAB 121 applies in the same way to different institutions.

They also warned that the SEC’s approach undermines investor protections, as inconsistent application of the rules across institutions prevents “enhanced” disclosures.

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