Regulatory Rumble: U.S. SEC's Missteps with Crypto Accounting Guidance

The Government Accountability Office (GAO) has raised concerns over the U.S. Securities and Exchange Commission's (SEC) issuance of "Staff Accounting Bulletin 121," asserting that it overstepped its authority. According to the GAO, this guidance, released in 2022, should have been treated as a formal rule rather than mere guidance. The GAO argues that proper federal rulemaking procedures were not followed, including submission to Congress for review before implementation.

• The Government Accountability Office has determined that the Securities and Exchange Commission erred by failing to submit SAB 121 to Congress, a necessary step for an official rule.
• On Tuesday, the SEC clarified that the outcome solely pertains to the interpretation of the guidance within the framework of the Congressional Review Act, without influencing the standing of the bulletin itself.

SAB 121 dictates that financial institutions holding customers' crypto assets must reflect them on their own balance sheets, necessitating the allocation of capital to cover them. This stance has been met with resistance from the industry and Republican lawmakers, who contend that it discourages regulated banks from acting as custodians for cryptocurrencies and treats crypto holdings differently from other assets.

The GAO's determination that SAB 121 qualifies as a rule under the Administrative Procedure Act may lead to its submission for congressional review. Should it undergo this process, lawmakers will have an opportunity, under the Congressional Review Act (CRA), to reject the rule.

In response to the GAO's findings, the SEC maintained that the status of SAB 121 as nonbinding SEC policy remains unchanged. The SEC argues that the accounting policy does not qualify as an "agency statement" of "future effect," and thus should not be considered a formal rule. Federal agency rulemaking typically involves a multi-step process that includes public comment periods, finalization, and submission to Congress for potential approval or rejection.

The GAO's stance has been seen as a setback for the SEC within the crypto industry. Critics argue that SAB 121, disguised as staff guidance, effectively imposes regulations on SEC-reporting banks, hindering their ability to custody digital assets on a large scale. SEC Commissioner Hester Peirce has previously voiced her dissent, characterizing the commission's approach to crypto as "scattershot and inefficient."

Cody Carbone, the Vice President of Policy for the Chamber of Digital Commerce, stated in a message on platform X that this matter will be presented for a disapproval vote. Each branch of Congress now holds the opportunity until December 31 to approve a resolution of disapproval, potentially nullifying the rule.

The GAO reviewed this proposal at the request of a member of Congress. This will be brought up for a vote of disapproval.

Each chamber of Congress now has until December 31 to pass a resolution of disapproval to invalidate the rule. @DigitalChamber will actively reach out to…

— Cody Carbone (@CodyCarboneDC) October 31, 2023

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