WASHINGTON — Congress’s biggest cryptocurrency supporters oppose a Securities and Exchange Commission bulletin that would impact how banks and financial institutions account for digital assets.
In a letter sent to the SEC Thursday, House Financial Services Committee Chairman Patrick McHenry, RN.C., and Sen. Cynthia Lummis, R-Wyo., who are each working on legislation to regulate the cryptocurrency industry, said they had “concerns” about a staff accounting bulletin, known as SAB 121.
The problem is how crypto platforms calculate risk. Crypto platforms tend not to include clients’ crypto assets when calculating the risk their business faces. SAB 121 effectively tells them that they must include these client assets in their risk analysis.
The letter comes as the SEC and lawmakers continue to wrestle with how to effectively regulate cryptocurrencies and other digital assets, a topic that has been made more urgent by the high-profile collapse of many major crypto platforms, including Understood Celsius And FTX. Many customers have lost money or had their assets frozen as platforms attempt to settle their bankruptcies.
“A recent decision by the Bankruptcy of Celsiuswhich categorized all Celsius customers as unsecured creditors, and therefore last in line to recover their assets, highlights the legal risk of effectively forcing customers’ assets in custody to be placed on the balance sheet,” the lawmakers wrote.
In January, the Biden administration called on Congress to “expand the powers of regulators to prevent abuses of client assets — which harm investors and distort prices — and to mitigate conflicts of interest.”
The SEC is considered most likely government entity to regulate digital assets and has struggled with questions such as whether cryptocurrencies should be considered as titles. SEC Chairman Gary Gensler said he believes so.
How the SEC regulates cryptocurrencies will have major implications for customers and the many companies that have grown rapidly in recent years around the crypto industry. The industry has also focused on lobbying efforts.
SAB 121, issued by the SEC’s Office of the Chief Accountant last March, marks the first time that digital asset platforms have received instructions on how to account for volatile cryptocurrency values.
Such newsletters from the SEC are relatively rare (only three have been issued since 2019) and are issued by staff to set out their views on how companies should handle certain accounting issues. In August, Gensler defended SAB 121 as an integral part of the operations of the SEC.
Lawmakers fear this will create greater risks for consumers and increase compliance costs for financial institutions. Since the publication of the bulletin, the SEC has been pushed back by banks and cryptocurrency companies.
“Given that SAB 121 purports to require banks, credit unions and other financial institutions to actually place digital assets on their balance sheets, this would trigger a massive capital charge. This is likely to prevent these conservatively regulated entities from engaging in the custody of digital assets,” they wrote.
In January, McHenry created the first-ever congressional panel focused solely on cryptocurrency and digital assets. The subcommittee on digital assets, fintech and inclusion, under the financial services committee, will be chaired by another leading Republican on the issue, Rep. French Hill, R-Ark.
Lummis, who last June unveiled sweeping legislation to regulate the crypto industry with Sen. Kirsten Gillibrand, DN.Y., plans to reintroduce the law on responsible financial innovation sometime in April, a spokesperson said.
Jason Abbruzzese contributed.