House challenge fails: Despite SEC softening stance, Biden's veto remains solid

Accounting Bulletin 121 (SAB 121) issued by the U.S. Securities and Exchange Commission (SEC) stipulates that companies, including banks, must treat crypto assets held by customers as liabilities on their balance sheets, a requirement that has caused large banks to Currency custody services face efficiency bottlenecks.

In order to change this situation, the House and Senate of the U.S. Congress passed a bipartisan Congressional Review Act (CRA) resolution aimed at repealing this guidance of SAB 121. However, the Biden administration vetoed the resolution in May.

Although the president's veto created a hurdle for the bill's passage, the House of Representatives held a vote on July 11 to try to overturn the veto, according to American Banker. Unfortunately, the voting result did not reach the two-thirds majority required to overturn the president's veto, that is, the final result was 228 votes in favor and 184 votes against, failing to overturn the president's veto.

SAB 121 threatens the legislative security of digital assets

Patrick McHenry, the pro-cryptocurrency chairman of the House Financial Services Committee, expressed disappointment with President Biden’s veto of the bipartisan Congressional Review Act (CRA) resolution. He stressed: “This is a mandate from the Americans we represent. Despite all the recent progress and bipartisan agreement, President Biden has vetoed the first legislation ever passed by the House and Senate targeting digital assets. "

Major financial organizations including the American Bankers Association, the Bank Policy Institute, the Financial Services Forum, and the Securities Industry and Financial Markets Association jointly sent a letter to the House of Representatives this week expressing their concerns about SAB 121: “SAB 121 is not consistent with the long-standing relationship between assets under custody and The accounting treatment is vastly different and threatens the industry’s ability to provide customers with safe, robust custody of digital assets.”

Amid this challenge, however, the U.S. Securities and Exchange Commission (SEC) offers banks and brokerage firms a glimmer of hope. According to a July 11 report from Bloomberg, the SEC is now offering a way to allow these institutions to avoid reporting clients’ cryptocurrency holdings on their balance sheets, a departure from previous strict enforcement of SAB 121. Bloomberg’s Amanda Iacone explains that banks and financial institutions can get around this controversial accounting standard if they can take steps to offset the risks associated with crypto assets, such as ensuring customer assets are protected in the event of bankruptcy or failure.

This policy change provides greater flexibility for cryptocurrency custody services and may help facilitate more banks and companies entering the space, providing more options for U.S. cryptocurrency holders. Although the House’s attempt to override President Biden’s veto failed, the SEC’s shift in attitude could open a new path for the development of cryptocurrency custody services.

SEC’s stance is relaxed, SAB 121 supervision remains

The U.S. Securities and Exchange Commission (SEC) has recently shown a more flexible attitude toward banks and financial institutions, especially when it comes to cryptocurrency custody. Starting in 2023, some large banks have negotiated with the SEC and received approval to bypass balance sheet reporting if certain conditions are met. The SEC believes that its previous guidance has achieved its purpose of encouraging companies to confront and address the security and legal risks associated with cryptocurrency holdings.

The SEC’s new position provides more flexibility for banks and companies to provide cryptocurrency custody services, thereby providing a wider range of options for cryptocurrency holders in the United States. This marks positive progress for regulators in adapting to emerging financial technologies.

However, despite the SEC's softening, the House of Representatives this week attempted to override President Biden's veto of the Congressional Review Act (CRA) resolution, but failed to obtain the necessary two-thirds majority. As a result, Accounting Bulletin 121 (SAB 121) remains in effect, continuing to require companies to record cryptoassets held by customers as liabilities on their balance sheets. This also means that, despite some flexibility provided by the SEC, banks and financial institutions still face accounting and regulatory challenges when providing cryptocurrency custody services.

Conclusion:

While the SEC has demonstrated a proactive attitude toward adapting to emerging financial technologies, the continued validity of Accounting Bulletin 121 (SAB 121) and the failure of the House of Representatives to override President Biden’s veto of the CRA resolution means that banks and financial institutions are struggling to provide cryptocurrency custody. There are still accounting and regulatory challenges to face when serving.

As financial technology and the regulatory environment continue to develop, market participants need to continue to pay attention to policy changes to ensure that they can fully seize new opportunities in the investment market under the premise of compliance.

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