House Passes Resolution to Overturn SEC’s SAB 121 on Digital Asset Custody Services

The U.S. House of Representatives made a significant move yesterday by passing a bipartisan resolution to overturn the Securities and Exchange Commission’s (SEC) SAB 121, a staff accounting bulletin that has been restricting banks from offering digital asset custody services. The resolution saw 21 Democrats joining Republicans in voting in favor, with a count of 228 for and 182 against. Now, the Senate must take similar action to cancel SAB 121.

SAB 121 has been requiring listed companies, including banks, to record crypto assets as both an asset and liability on the balance sheet. This goes against the traditional treatment of assets under custody, where they typically do not appear on the balance sheet as they belong to the client. Compliance with Basel rules for banks also demands that banks providing custody set aside a dollar of capital for every dollar held in custody. This has not only made bank cryptocurrency custody challenging in the United States but has also impacted the custody of tokenized securities, with most custody for Bitcoin ETFs being provided by crypto specialists like Coinbase.

The opposition to SAB 121 has been strong, with the Government Accountability Office (GAO) determining that the rule warranted a Congressional review. House Financial Services Committee Chair Patrick McHenry criticized the SEC for bypassing Congress, the Comptroller General, and prudential regulators before issuing SAB 121. SEC Commissioner Hester Pierce also noted that the rule may not be in the best interest of investors, as banks have more experience in safeguarding customer assets compared to crypto specialists.

While some Democrats, like Maxine Waters, have expressed concerns about overturning SAB 121, citing the need for disclosure and asset protection, others believe that the rule has been too restrictive. The resolution aims to block the SEC from issuing any future guidance similar to SAB 121, including disclosure guidance on crypto custody.

The White House has stated its objection to overturning SAB 121, with the President threatening to veto the resolution if presented to him. The statement argues that the resolution would limit the SEC’s ability to address future issues related to crypto-assets and financial stability. The debate over SAB 121 is far from over, with both supporters and opponents making their voices heard in this crucial decision.