Republican Lawmakers Urge SEC to Repeal Controversial Crypto Rule SAB 121 Amid Bitcoin Regulation Debate

• On Monday, a notable push from over 40 Republican legislators prompted fresh scrutiny on the U.S. Securities and Exchange Commission’s contentious crypto custody rule.
• This letter, spearheaded by Chair of the House Financial Services Committee, Patrick McHenry, along with Senator Cynthia Lummis and other bipartisan lawmakers, follows the bipartisan dismissal of SAB 121 which faced a veto from President Joe Biden.
• Critics have long contended that SAB 121 disrupts traditional accounting standards, imposes undue pressures on financial entities, and hampers innovation within the crypto sector.

A group of bipartisan lawmakers revisit the contentious SEC crypto custody rule, urging clarity and reconsideration amidst ongoing regulatory debates.

Call for Clarity in Crypto Custody Rules

The demand for the U.S. Securities and Exchange Commission (SEC) to revise its crypto custody rule has been renewed by over forty Republican lawmakers. This push emphasizes the need for clearer regulatory guidelines in the crypto space, spotlighting the discord surrounding the crypto custody rule established under Staff Accounting Bulletin No. 121 (SAB 121). The contention revolves around the rule’s classification of digital assets as liabilities on balance sheets, a requirement that critics argue could impede financial institutions from entering the crypto custody market and expose consumers to heightened risks.

Bipartisan Efforts and Presidential Opposition

After a bipartisan repeal of SAB 121 was passed by Congress, President Joe Biden’s veto halted the progress. The veto was based on concerns regarding financial stability and investor protection. Despite this setback, the resolve among lawmakers remains undeterred as they point out that the current regulatory approach of the SEC is stifling the growth and innovation within the crypto industry. The lawmakers’ letter indicated that the SEC’s private dealings with certain institutions to help them sidestep compliance with SAB 121 further exacerbate the issue, raising transparency concerns.

Criticism of SEC’s Regulatory Approach

SAB 121, while instituted to mitigate the risks associated with digital asset custody, has faced significant backlash for potentially centralizing those risks rather than distributing them. By imposing liability recognition on custodians’ balance sheets, the rule could push custodial services towards less regulated, non-bank entities, amplifying potential systemic risks. Lawmakers posit that this regulatory method, perceived as “regulation via litigation,” lacks the transparency and predictability essential for fostering a robust and innovative financial environment.

Legislative and Judicial Pushback

Recent deliberations in federal court further underscore the ongoing tensions between the SEC and the crypto industry. Judges criticized SEC attorneys for their reliance on enforcement actions instead of providing clear regulatory frameworks. This criticism aligns with industry sentiments that the SEC’s ambiguous stance on classifying major cryptocurrencies like Bitcoin and Ethereum leaves market players in a state of regulatory limbo. Moreover, cryptocurrency exchange Kraken has signalled its discontent by demanding a jury trial to address the SEC’s accusations, reflecting the broader industry’s calls for judicial and regulatory clarity.

Conclusion

The ongoing discourse surrounding SAB 121 highlights a critical juncture for crypto regulation in the United States. Lawmakers, financial institutions, and the judiciary are increasingly pressuring the SEC to adopt a more transparent, consistent, and innovation-friendly regulatory approach. As this dialogue progresses, the future of crypto custody and broader market dynamics will significantly hinge on the regulatory frameworks established by the SEC and the response from legislative bodies.