US GAO Finds That SEC Broke Law With Its Crypto Accounting Rule

The United States Government Accountability Office (GAO) has brought the SEC to book for a “rule” it made for crypto custodians last year.

The United States Securities and Exchange Commission (SEC) has been constantly criticized for its approach to regulating the cryptocurrency industry. Now, a federal agency, the Government Accountability Office (GAO), has publicly confirmed that the SEC broke a rule in guidance that it provided to cryptocurrency-related companies in March 2022.

The SEC provided the controversial guidance using the Staff Accounting Bulletin (SAB) No. 121. Ideally, the SEC uses an SAB to tell members of the public its staff opinions and interpretations regarding a particular subject affecting public companies. SABs are naturally not binding on affected entities, but they provide guidance that companies try to abide by.

In SAB 121, published on March 31, 2022,  the SEC introduced the idea that crypto companies holding digital assets must double-count the assets on their balance sheet. The guidance meant that companies had to hold twice the amount of the value of an asset that a user stores with them. The SEC cited the huge risks associated with the cryptocurrency industry as the basis for providing the guidance.

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However, the GAO has concluded after investigations that the SEC violated the Congressional Review Act (CRA) by issuing the SAB on digital asset custody. Precisely, the GAO found that the SEC’s guidance constituted a “rule” and thus was subject to Congressional review.

Yet, the agency did not submit a report to Congress before issuing the rule. Additionally, the agency did not notify the Comptroller General about the rule, another requirement under the Congressional Review Act.

Crypto-Friendly Lawmakers Come to the Rescue

In announcing its decision that the SEC violated federal law, the GAO cites a publication by SEC Commissioner Hester Peirce. The crypto-friendly commissioner published a rebuttal following the SEC’s passing of SAB 121, alleging the same offense that the GAO has now confirmed.

In her opinion piece, the Commissioner noted that the SEC was providing “definitive interpretive guidance” through an SAB rather than complying with a congressional requirement that such rules pass through a clear review process. Hester Peirce described SAB 121 as “another manifestation of the Securities and Exchange Commission’s scattershot and inefficient approach to crypto.” 

Additionally, the GAO confirmed that its decision to review the SEC’s SAB 121 followed a formal request by Senator Cynthia M. Lummis to the Comptroller General. Senator Lummis is a crypto-friendly lawmaker known for opposing the SEC’s approach to regulating the emerging industry.

Crypto Industry Reacts to GAO Ruling

Meanwhile, key thought leaders in the cryptocurrency space have responded to the GAO’s findings that the SEC violated the Congressional Review Act (CRA). 

Stuart Alderoty, Ripple’s Chief Legal Officer (CLO), expressed satisfaction that the SEC was “being shamed for ignoring the law.” Ripple has been in conflict with the SEC since late 2020 and has secured a series of victories supporting its contention that the agency has failed in its approach to regulating crypto assets.

While Mr. Gensler is making bad Halloween jokes on X, his agency is being shamed for ignoring the law that requires agency rules to be reviewed by Congress. Seems the SEC has become the lawless Wild West Gensler loves to talk about so much. https://t.co/WTkyRhyrLy

— Stuart Alderoty (@s_alderoty) October 31, 2023

Jake Chervinsky, the chief policy officer of the industry group Blockchain Association, also commented on the recent GAO ruling. Chervinsky slammed the SEC’s SAB 121 as an “illogical anti-crypto accounting bulletin” that has cost crypto companies millions in legal and consulting fees.

This is huge.

The GAO reviewed SAB 121, an illogical anti-crypto accounting bulletin issued by the SEC last March, and found that it’s a “rule” under the CRA and APA.

The SEC didn’t comply with either.

This is a clear statement from a federal agency that the SEC broke the law. https://t.co/brglK3sm8S

— Jake Chervinsky (@jchervinsky) October 31, 2023

The GAO’s finding means that the SEC must now follow due process and submit its recommendations for digital asset custody accounting to Congress. Alternatively, the agency might retract the bulletin, which would further highlight that the bulletin was part of its unhealthy agenda against the cryptocurrency industry.