WASHINGTON — Congress’ biggest proponents of cryptocurrencies are pushing back against a Securities and Exchange Commission bulletin that would affect how banks and financial institutions account for digital assets.
House Financial Services Committee Chair Patrick McHenry, R-N.C., and Sen. Cynthia Lummis, R-Wyo., who are each working on legislation to regulate the cryptocurrency industry, said Thursday in a letter to the SEC that they have “concerns” about a Staff Accounting Bulletin known as SAB 121.
At issue is how crypto platforms calculate risk. Crypto platforms tend not to include customers’ crypto assets when they calculate how much risk their businesses face. SAB 121 in effective tells them they should include those customer assets in their risk analyses.
The SEC and lawmakers continue to wrestle with how to effectively regulate cryptocurrencies and other digital assets, a subject that has been made more urgent by the high-profile collapse of many major crypto platforms, including Celsius and FTX. Many customers have either lost money or have had their assets frozen as the platforms try to sort out their bankruptcies.
“A recent decision in the Celsius bankruptcy, which classified all Celsius’ customers as unsecured creditors, and therefore at the back of the line to recover their assets, highlights the legal risk of effectively forcing customer custodial assets to be placed on balance sheet,” McHenry and Lummis wrote.
In January, the Biden administration called on Congress to “expand regulators’ powers to prevent misuses of customers’ assets — which hurt investors and distort prices — and to mitigate conflicts of interest.”
The SEC, which is considered the most likely government entity to regulate digital assets, has been wrestling with questions such as whether cryptocurrencies should be considered securities. SEC Chair Gary Gensler has said he believes they are.
How the SEC regulates cryptocurrencies will have major consequences for customers and the many companies that have grown quickly in recent years around the crypto industry. The industry has also leaned into lobbying efforts.
SAB 121, which the SEC’s Office of the Chief Accountant issued last March, represents the first time digital asset platforms are receiving instructions about how to account for the unstable values of cryptocurrencies.
Such bulletins from the SEC are relatively rare (only three have been issued since 2019), and they are issued by staff members to outline their views on how companies should handle certain accounting issues. In August, Gensler defended SAB 121 as being a standard part of SEC operations.
McHenry and Lummis are concerned it would create greater risks for consumers and increase compliance costs for financial institutions. Since the bulletin was issued, the SEC has received pushback from banks and cryptocurrency companies alike.
“Since SAB 121 purports to require banks, credit unions and other financial institutions to effectively place digital assets on their balance sheets, it would trigger a massive capital charge. This in turn is likely to prevent these prudentially regulated entities from engaging in digital asset custody,” they wrote.
In January, McHenry established the first congressional panel focused solely on cryptocurrency and digital assets. The Financial Services subcommittee on digital assets, financial technology and inclusion will be chaired by another leading House Republican on the issue, French Hill of Arkansas.
Lummis, who proposed expansive legislation in June to regulate the crypto industry with Sen. Kirsten Gillibrand, D-N.Y., plans to reintroduce the Responsible Financial Innovation Act in April, a spokesperson said.