US House Committee Moves to Overturn SEC Rule Limiting Bank Crypto Custody

Background of the Resolution

On February 29, 2024, the US House Financial Services Committee voted to advance a resolution aimed at nullifying the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 121 (SAB 121). This bulletin, introduced in March 2022, requires institutions that custody crypto assets to record these holdings as liabilities on their balance sheets. The guideline has been criticized for imposing significant regulatory burdens on banks, effectively preventing them from offering crypto custody services at scale.

Key Points of Contention

Regulatory Burden on Banks: The primary concern raised by lawmakers, including Republican Congressman Mike Flood and Democrat Representative Wiley Nickel, is that SAB 121 unfairly burdens banks by treating custodied digital assets as on-balance sheet liabilities. This approach diverges from the traditional treatment of custodial assets, such as securities, which are typically held off-balance sheet. The on-balance sheet requirement impacts banks’ capital and liquidity requirements, making it challenging for them to engage in digital asset custody.

Consumer Protection and Market Impact: Proponents of the resolution argue that limiting banks’ ability to provide custody services for digital assets leaves consumers with fewer regulated and trusted options, potentially exposing them to higher risks. They emphasize that banks are well-regulated institutions capable of offering safe and sound custody solutions for digital assets, which is crucial for protecting consumers.

Bipartisan Support and Opposition: The resolution to overturn SAB 121 has garnered bipartisan support, reflecting a broad consensus that the SEC has overstepped its regulatory bounds. However, there is also significant opposition, notably from Democrat Congresswoman Maxine Waters, who argues that repealing SAB 121 would prevent the SEC from providing necessary regulatory clarity around cryptocurrency.

Legislative Process and Future Prospects

The resolution, H.J. Res. 109, has passed the House committee stage and now requires approval from the full House and Senate. If both chambers pass the resolution, it will be sent to President Biden for signature. However, the administration has expressed concerns that overturning SAB 121 could weaken investor protections and financial stability.

Broader Implications for the Crypto Market

The outcome of this legislative effort could have significant implications for the cryptocurrency market and the broader financial ecosystem:

• Enhanced Role of Banks in Crypto Custody: If the resolution succeeds, it could pave the way for banks to become major players in the digital asset custody market. This would likely enhance consumer trust and drive greater institutional adoption of cryptocurrencies.
• Regulatory Clarity and Innovation: Overturning SAB 121 may encourage more innovative financial products and services related to digital assets, as banks would have clearer guidelines for offering custody solutions.
• Increased Scrutiny and Regulation: Regardless of the outcome, this legislative effort underscores the ongoing tension between regulatory agencies and the need for a balanced approach to cryptocurrency regulation. It highlights the necessity for clear, consistent, and practical regulatory frameworks that support both innovation and consumer protection.

Conclusion

The move by the US House Financial Services Committee to overturn the SEC’s rule limiting bank crypto custody represents a critical juncture in the regulation of digital assets. The resolution’s progress and potential enactment could significantly reshape the landscape for crypto custody services, enhancing the role of banks and providing greater security for consumers. As the debate continues, stakeholders will need to balance regulatory oversight with the need to foster innovation and growth in the rapidly evolving cryptocurrency market.