The Security and Exchange Commission’s accounting bulletin 121 (SAB 121) requires companies, including banks, to hold crypto assets for clients as a liability on their balance sheets. This makes it inefficient for large banks to offer crypto custody services. Both the House and Senate passed a bipartisan Congressional Review Act (CRA) resolution to nullify this guidance, which the Biden Administration vetoed in May. However, a House vote to overturn the veto failed to reach the required two-thirds majority, with a 228-184 result on July 11, according to reports by the American Banker.
Pro-crypto Chairman of the House Financial Services Committee, Patrick McHenry, commented that the veto was against the mandate of the Americans represented by Congress. Despite the bipartisan agreement, President Biden had vetoed the first digital-asset-specific legislation to ever pass the House and Senate. Various industry associations have also expressed concerns about SAB 121, stating that it threatens the industry’s ability to provide safe custody of digital assets.
However, the SEC is now offering a path for banks and brokerages to avoid reporting their customers’ crypto holdings on their balance sheets. Banks and financial institutions can bypass the controversial accounting guidance by implementing measures to offset risks associated with crypto assets, such as ensuring customer asset protection in case of bankruptcy or failure. This move by the SEC is seen as a step towards relaxing the stringent requirements of SAB 121 for banks and brokerages.
Several large banks have been in consultation with the SEC since 2023 and have received approval to bypass balance sheet reporting under certain conditions. The SEC believes that the original guidance has prompted companies to address security and legal risks associated with crypto holdings. This new, more flexible stance could potentially allow more banks and companies to offer crypto custody services, providing more options for American crypto holders.
Despite the softening of the SEC’s stance, SAB 121 remains in place following the failed attempt to override Biden’s veto in the House. The industry will need to navigate the existing regulatory landscape while taking advantage of the new flexibility offered by the SEC. This development could lead to increased participation in the crypto market by banks and financial institutions, ultimately benefiting American consumers and investors.