Congressmen urge the SEC to repeal the rule on accounting for client crypto assets as liabilities

What’s new? More than 40 US senators and Republican representatives have called on the Securities and Exchange Commission (SEC) to repeal accounting rule SAB 121, which requires custodians to account for customer crypto assets in their accounts as liabilities. Officials claim that in implementing the rule, the regulator evaded the norms of the legislative process that requires consultation.

The congressmen’s appeal

What else is known? In May, majorities in both houses of Congress opposed the implementation of SAB 121, but the Biden administration announced its intention to veto the lawmakers’ decision. Because the congressmen could not muster enough negative votes (2/3) to override the veto, the decision to implement SAB 121 stood.

In a letter to the SEC dated September 23, House Financial Services Committee Chair Patrick McHenry, Senator Cynthia Lummis, and 40 other politicians stated that SAB 121 changes the rules for holding cryptocurrencies, weakens consumer protections, and stifles financial innovation.

They emphasized that the new rule was adopted without consultation with other financial regulators, and its proposed approach to asset accounting differs from established standards.

For example, counting customer crypto assets as liabilities misrepresents the actual liabilities of custodians and exposes consumers to financial risks.

In addition, the SEC did not properly file a notice and comment process when proposing the new rule, which is contrary to the rules of the Administrative Procedure Act.

That said, the rule does not apply to everyone in the industry. For example, BNY Mellon, the largest bank, was exempted from complying with SAB 121.

“Rescinding SAB 121 is the only appropriate action and well within the SEC’s authority,” the letter says.

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Notably, Democratic Party Representative Wiley Nickel also previously stated that SAB 121 would prevent US banks from storing cryptocurrency exchange-traded products (ETPs) on a large scale. He argued that this would create a concentration risk, as control of most of the assets would go to non-banks.

In June, a US court struck down the SEC’s rule to increase hedge fund transparency, ruling that the regulator had exceeded its authority.