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Securities Regulation Daily Wrap Up, BLOCKCHAIN—House disapproves SEC digital asset accounting and custody guidance, (May 8, 2024)

By Mark S. Nelson, J.D.

Republicans pushed the resolution as a means to curb guidance the GAO found to be a rule and to remove what they called excessive digital asset custody requirements.

A Republican-led effort to overturn the SEC’s Staff Accounting Bulletin No. 12 ...

By Mark S. Nelson, J.D.

Republicans pushed the resolution as a means to curb guidance the GAO found to be a rule and to remove what they called excessive digital asset custody requirements.

A Republican-led effort to overturn the SEC’s Staff Accounting Bulletin No. 121, which sought to provide guidance to firms on the proper methods to account for the custody of digital assets, picked up a few Democratic members’ votes on its way to passage in the House today. The use of the Congressional Review Act (CRA) has spiked in recent years, although most such resolutions still fail to take effect when a political party does not control both the White House and Congress. The Biden Administration has already telegraphed a presidential veto if the resolution were to reach the president’s desk. The resolution passed by a vote of 228-182 with 21 Democratic votes in favor of the resolution. The resolution now goes to the Senate.

The contents of SAB No. 121 consist of three Q&A-style sets of guidance, although it is the first question regarding how to account for the safeguarding of crypto assets that has drawn the most attention. The SEC stated that a crypto firm should enter a liability and asset on its balance sheet for any custodied crypto and that the value of the safeguarding liability and the asset should be the fair market value of the crypto assets held for platform users. The remaining Q&As deal with disclosure matters and the time frame for applying the guidance to financial statements.

In February, the House Financial Services Committee reported the CRA resolution to the full House by a vote of 31-19, with an added push from Democratic Reps. Josh Gottheimer (D-NJ), Ritchie Torres (D-NY), and Wiley Nickel (D-NC). The debate today was along the same lines as the one held during the February markup session.

On the House floor, Rep. Patrick McHenry (R-NC), Chair of the House FSC, said the Administration’s approach to digital assets did not make sense. He suggested that, on the one hand, the Administration talks about legitimizing digital assets but, on the other hand, the Administration’s agency heads take actions that undermine that goal. McHenry also tried to refute the central charge made by House FSC Ranking Member Maxine Waters (D-Calif) that the CRA resolution would harm digital asset markets and investors by arguing that the resolution was nothing more than an attempt to place checks and balances on the exercise of regulatory authority.

Waters had characterized the resolution as a “dangerous” and “reckless” use of the CRA. During her closing remarks, she said the resolution was “a giveaway to one powerful special interest group to weaken the SEC.” She argued that the resolution would eliminate the transparency the SEC had sought to create on digital asset custody and that result would harm investors and lead to even more volatility in digital asset markets. Earlier during the floor debate, Waters posited that Republicans advocating for the resolution did not want clarity but instead wanted broad exemptions from the federal securities laws.

Representative French Hill (R-Ark), Chair of the House FSC’s Subcommittee on Digital Assets, Financial Technology and Inclusion, reiterated the need for SAB 121 to go through the traditional rulemaking process, especially because it would reshape the business of custody in the country. He also noted that banking regulators had testified that they had not been consulted by the SEC in advance of the issuance of SAB 121.

Democrat Nickel told members that SABs are meant to interpret existing rules. But he added that they should not be used to create new rules.

The White House issued a Statement of Administration Policy promising a presidential veto in advance of the House vote. “By virtue of invoking the Congressional Review Act, it [the resolution] could also inappropriately constrain the SEC’s ability to ensure appropriate guardrails and address future issues related to crypto-assets including financial stability,” said the statement. “Limiting the SEC’s ability to maintain a comprehensive and effective financial regulatory framework for crypto-assets would introduce substantial financial instability and market uncertainty.”

The crypto industry and investors will next turn their attention to what could be a blockbuster end to the month as McHenry, Waters, and the Administration seek to finalize legislation that could provide a legal framework for stablecoins, as has been reported by several media outlets. On the House floor today, McHenry alluded to what the principals involved in the latest negotiations have said they want—a stablecoin bill and a market bill that defines what is and is not a digital asset. McHenry also said that, on the consumer protection front, investors want to know that, in a crypto firm bankruptcy, they can get their asset back.

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