What does the SAB 121 vote mean for future crypto legislation?

The U.S. Senate joined the House of Representatives in voting to repeal a controversial SEC accounting rule that imposed onerous capital requirements on crypto custodians. This is a relatively significant matter because the so-called staff accounting bulletin, SAB 121, is one of the few regulations that the crypto and banking industries have jointly opposed. Unfortunately, however, the legislative measure now heads to the desk of President Joseph Biden, who has vowed to veto it in a show of support for the SEC. While several prominent Democrats, including New York Senator Chuck Schumer, voted in favor of overturning the proclamation, the Senate’s 60-38 vote on Thursday fell short of the threshold needed to override a presidential veto. The vote was difficult to decipher and seemed to suggest some kind of realignment of lawmakers’ willingness to pass sensible crypto regulations (or at least repeal bad ones). However, there are a number of reasons why abandoning SAB 121 is justified, one of which is that the nonpartisan Government Accountability Office found that the SEC rammed through the rule without proper congressional oversight.

Of course, long-time cryptocurrency skeptic Senator Elizabeth Warren voted to retain the rule, arguing that:“The unique risks of cryptocurrencies can have serious implications for a company’s financial health. SAB 121 simply clarifies how companies should address those risks in their financial disclosures.”But does bipartisan support for repealing the rule bode well for other legislative efforts, like the stablecoin and market structure bills under consideration?

Opinions Divided

"Without wanting to throw cold water on this, I don't think the Democratic support for repealing crypto accounting rules means a veto won't happen. I think the Democrats' 'yes' vote in the vote against SBA 121 was because they knew the White House would veto it. That's causation reversed," James Wester, head of crypto and co-head of payments at Javelin, said on X. Apparently it's easier to vote yes when you know it's going to be vetoed in the end?

Meanwhile, Austin Campbell, an associate professor at Columbia Business School, said Thursday's vote proved that cryptocurrency is a bipartisan issue. "This is an American issue, not a partisan issue," he said.

Regardless, the fragility of cryptocurrency legislation is worrisome. A rule that was approved by a bipartisan majority vote, widely criticized by industry insiders and even called “dumb” by people like Nadine Chakar, who has been called one of the most important women in finance, who helped found State Street Digital, now runs the DTCC’s crypto division and will speak at Consensus 2024, may yet remain in place.

This is not just a purely academic question, as SAB 121, while technically “non-binding,” has already impacted the ability of financial institutions to enter the crypto custody business, according to an open letter signed in February by the Bank Policy Institute (BPI), the American Bankers Association (ABA), the Financial Services Forum (FSF), and the Securities Industry and Financial Markets Association (SIFMA).

It’s a bit of a counterfactual question, but how far would areas like stablecoins and interbank blockchain rails have developed if clear regulations had been in place a few years ago? Clearly, regulatory uncertainty (and more recently, hostility) has prevented companies from experimenting in the cryptocurrency space. For example, as Fortune’s Jeff John Roberts recently wrote, there are certainly some large custodians who would be interested in custodying all of the bitcoin in an ETF.

It’s interesting that 12 Democrats in the Senate were able to come together to help vote to overturn a harmful rule, but I’m not sure the SAB 121 story is really that encouraging.