U.S. Lawmakers Say SEC Directive May Bring “Greater Risk of Loss”

Senator Cynthia Lummis and Congressman Patrick McHenry said that SEC accounting guideline “places client money at greater risk of loss if a custodian goes bankrupt or enters receivership.” The congressmen criticized SAB 121, the SEC’s April Staff Accounting Bulletin, in a Thursday letter to the FDIC, Federal Reserve, OCC, and NCUA.

The bulletin was intended to clarify how to account for digital assets held by custodians, exchanges, and other platforms, but Lummis and McHenry say its pronouncements would put customer assets at greater risk of loss if a custodian collapsed, “violating the SEC’s fundamental mission to protect customers.”

SAB 121 requires enterprises to record a liability and offset on their balance sheets at the fair value of client custodial digital assets.

The MPs noted a Recent bankruptcy judgement that classed all customers as unsecured creditors, placing them “at the end of the queue to retrieve their assets.” The letter states that “SAB 121 upends decades of precedent regarding the accounting treatment of custodial assets for banks, credit unions, and other regulated financial institutions,” requiring them to effectively place digital assets on their balance sheets “would trigger a massive capital charge.”

Assets, liabilities, and shareholder equity are listed on a company’s balance sheet. The corporation does not own or owe off-balance goods.Lummis and McHenry argued the SEC bulletin did not define digital assets. “The extent of assets covered by this wide definition—virtual money, stablecoins, or even tokenized equities—is unclear,” they said. “A more sophisticated hierarchy for this asset class—considering the benefits and hazards of digital assets with varied functions—is necessary.”

The letter asks the agencies if they will direct banks and other financial institutions under their jurisdiction to comply with the SEC bulletin or if they believe the bulletin weakens consumer protection by preventing well-regulated banks, credit unions, and other financial institutions from providing digital asset custodial services.

Wyoming Sen. Cynthia Lummis, the “Bitcoin Senator,” joined Dan Roberts and Stacy Elliott on the gm podcast to discuss the Lummis-Gillibrand crypto regulatory bill, the need for clearer crypto policy in Washington, converting crypto doubters, the bear market, and NFTs. Join the podcast. Watch and subscribe to the gm podcast on ITunes or Spotify.

Lummis and McHenry ordered the agencies until March 16 to answer if the SEC contacted them before SAB 121 was issued and whether the SEC suggested that it would change or remove the bulletin if it drew widespread criticism.

When FTX collapsed in November 2022, Chair Gary Gensler has increased SEC enforcement proceedings. Congress has questioned Gensler’s crypto industry and FTX CEO Sam Bankman-Fried interactions. The SEC has fined Lbry, Kraken, and other crypto businesses in recent months.