US Republicans challenge SEC over controversial cryptocurrency regulation SAB 121

More than 40 Republican lawmakers from the United States are urging the Securities and Exchange Commission (SEC) to rescind its controversial Staff Accounting Bulletin No. 121 (SAB 121). The rule, which affects how companies account for cryptocurrencies, has sparked significant debate, with bipartisan support for its repeal initially overridden by a presidential veto.

SAB 121 alters custody rules for cryptocurrency holdings, requiring SEC-reporting entities that hold cryptocurrencies to list them as liabilities on their balance sheets. This has led to claims that the rule undermines consumer protection and hampers financial innovation. In a letter addressed to SEC Chair Gary Gensler, House Financial Services Committee Chair Patrick McHenry, Senator Cynthia Lummis, and 40 other politicians expressed their concerns.

Allegations of Procedural Shortcomings

The group argues that the SEC failed to consult appropriate regulatory bodies when introducing SAB 121. They claim the rule departs from established accounting practices, potentially exposing consumers to risk by misrepresenting the obligations of custodians.

The politicians further criticised the SEC for bypassing standard rulemaking procedures, accusing it of issuing SAB 121 as "staff guidance" to avoid the required public notice and comment process.

They asserted that the rule needs to be repealed to avoid further complications within the financial system.

Related reading：In Case of SAB 121 Rejection, FDIC Nominee Goldsmith Romero Says Banks Can Custody Digital Assets

Impact on Cryptocurrency Custody

One of the key concerns is that the rule could prevent US banks from managing cryptocurrency exchange-traded products (ETPs) effectively, a point raised by Democrat Representative Wiley Nickel.

This, Nickel argued, could lead to “concentration risk” as control would shift from banks to non-bank institutions.

Adding to the controversy, there have been claims of selective exemptions.

For instance, during a Wyoming legislature hearing, it was revealed that Bank of New York Mellon, the largest custodian bank in the US, reportedly received an exemption from SAB 121.

Legislative Hurdles

The push to repeal SAB 121 has seen strong support from prominent Republicans, including House Representatives French Hill and Tom Emmer, and Senators Bill Hagerty and Tim Scott.

Despite gaining bipartisan backing in both the House and Senate, President Joe Biden vetoed the repeal bill in June. A subsequent attempt to overturn the veto in July fell short by 60 votes, effectively stalling further legislative action.

Conclusion: A Regulatory Misstep

The introduction of SAB 121 has ignited widespread criticism from US politicians and financial experts alike. While the SEC’s intentions may have been to improve transparency and consumer protection, its approach has raised concerns over inconsistency and potential risks.

The failure to follow established rulemaking processes further clouds the situation, making the calls for a repeal of SAB 121 increasingly urgent.