US Senate Scraps SEC Crypto Policy, But Biden Says He’ll Veto: SAB 121 Explained

Lawmakers, cryptocurrency heavyweights and banking executives argue that an SEC policy on cryptocurrency custody and accounting hurts U.S. investors and stifles innovation, but Joe Biden disagrees.

Washington is preparing for an almighty battle over a controversial issue SEC dominant.

There was a significant turning point last week, when the House of Representatives voted to repeal Staff Accounting Bulletin (SAB) 121.

What is SAB 121?

SAB 121 requires public companies to account for and disclose the obligations and risks of safeguarding customers’ crypto assets. The policy is controversial because of its potential to complicate financial reporting and increase operational burdens.

These rules were implemented in 2022 and have sparked fierce criticism from across the cryptocurrency industry, as well as from banks who argue that the measures have effectively prevented them from offering digital asset services.

The U.S. Senate voted on May 16 to overturn the SEC guidelines, but critics of SAB 121 aren’t out of the woods yet.

The Senate ruling has yet to receive presidential approval. However, President Joe Biden said he was prepared to veto the resolution abolishing SAB 121 altogether. A White House statement made clear the administration’s support for SAB 121, saying:

“SAB 121 was issued in response to demonstrated technological, legal, and regulatory risks that have caused substantial losses to consumers…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. “

White House statement

The SEC faces backlash

Some Democratic lawmakers have urged SEC Chairman Gary Gensler to withdraw SAB 121 on his own initiative, rather than wait for Congress to do so.

One of them is Congressman Wiley Nickel, representing North Carolina’s 13th district, who says he is confident that Joint Resolution 109 will pass the Senate.

Nickel argues that eliminating SAB 121 would better protect investors and ensure the United States is competitive on the global stage. Banks with a strong track record of providing fiat custody services could extend their offering to cryptocurrencies. Given that similar crypto projects Traveler AND Centigrade failed to protect their clients’ assets even after SAB 121 went into effect, with some arguing that the regulation was ineffective from the start.

In a letter to GenslerCongressman Nickel stated:

“The SEC’s open hostility toward the digital assets industry does not serve President Biden’s interests. The SEC is turning cryptocurrency regulation into a political issue and forcing President Biden to choose sides on an issue that matters to many Americans.”

Congressman Wiley Nickel

Nickel warned Gensler that SAB 121 amounts to a “prohibitive regulatory burden” and means U.S. consumers have no choice but to rely on “riskier offshore custody solutions.”

Nickel continued to criticize the SEC’s approach to digital assets as “misleading” and highlighted concerns about how SAB 121 was applied. While accounting staff bulletins are traditionally intended to serve as best practice guidelines, he accused the commission of a “breach of the rulemaking process” because of the way it was used to implement new policies.

‘Folly’ – Consulting firm founder blames SAB 121 for FTX debacle

Austin Campbell, the founder of Zero Knowledge Consulting, described SAB 121 as “madness,” not least because it was “unilaterally adopted without consultation” and “harms the rights of cryptocurrency holders in the event of failure.” Campbell took to social media, stating:

“It is entirely possible that this rule is part of what caused FTX, as without it, there could have been regulated custodians serving customers and exchanges in the United States, which would have prevented self-dealing and theft.”

Austin Campbell

He went on to warn that major financial institutions strongly dislike SAB 121 because they are locked out of the growing demand for exchange-traded funds based on the spot price of Bitcoin.

Cardano Founder Charles Hoskinson has also been highly critical of Biden’s stance on digital assets, claiming that his administration has attempted to destroy the US cryptocurrency sector.

He went on to argue that it is inappropriate for the SEC to use 90-year-old legislation to regulate cryptocurrencies, and the heavy-handed approach to regulation has already forced a number of legitimate exchanges and trading platforms to relocate elsewhere, benefiting rival economies through job creation and tax revenue.

With a veto looming on the horizon, this saga is far from over. It will be interesting to see how lawmakers on Capitol Hill, not to mention TradFi and cryptocurrency industry leaders, react.

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