Bipartisan Efforts to Challenge SEC’s SAB 121

A recent memo from several U.S. Congress members has sparked significant discussions in financial circles. They are pressing key financial authorities, including the chair of the Federal Deposit Insurance Corporation and the acting comptroller of the currency, to declare that the U.S. Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121) is unenforceable. This follows findings by the Government Accountability Office (GAO) that suggest the bulletin might not meet legal standards.

What’s the Scoop on SAB 121?

SAB 121 requires that crypto assets held by bank customers be recorded on the banks’ balance sheets, which would mean that banks need to maintain significant capital requirements for these assets. Many in the industry argue that this stance makes banks hesitant to engage in crypto custody, treating digital assets distinctly from other more traditional holdings.

GAO’s Finding and Congressional Response

The GAO’s determination that SAB 121 essentially constitutes a “rule” under the Congressional Review Act is causing quite the stir. Thanks to a letter from Senator Cynthia Lummis, this situation has raised red flags about the legal path the SEC is navigating. It creates room for potential disapproval by Congress—a prospect that is certainly making some bureaucratic heads spin.

Lawmakers Weigh In: Concerns Over Regulatory Overreach

Among the Congress members vocal against SAB 121 are Lummis, Senator Kirsten Gillibrand, and Representatives Patrick McHenry, French Hill, Ritchie Torres, Mike Flood, and Wiley Nickel. They’re worried about the implications of enforcing a rule that doesn’t line up with existing regulations. They believe doing so could set a precedent for regulatory overreach—new pathways for agencies like the SEC to flex their authority beyond what Congress has sanctioned.

Past Communication: Dissatisfaction with SEC Regulation

This isn’t the first time Congress has taken a shot at the SEC’s approach. Back in June 2022, five senators expressed their discontent over what they termed “backdoor regulation” during previous exchanges with SEC Chair Gary Gensler. In an intense hearing before the House Financial Services Committee, even Representative Flood did not hesitate to put Gensler on the spot regarding the controversial bulletin.

What’s Next? The Future of Crypto Custody Services

With the SEC’s SAB 121 hanging in the balance, banks and credit unions that offer digital asset custody services are left in limbo. Will they need to comply with an unenforceable bulletin or will common sense prevail? Only time will tell as legislators navigate this hot-button issue.