U.S. President Joe Biden vetoed a bill intended to overturn an unpopular Securities and Exchange Commission (SEC) bulletin, SAB 121, which established accounting standards for firms that custody digital assets. Earlier this month, the House of Representatives and Senate both voted to overturn SAB 121 because they feared it could prevent banks from safeguarding digital assets.
“My Administration will not support measures that jeopardize the well-being of consumers and investors,” said President Biden in a May 31 letter addressed to the House. “Appropriate guardrails that protect consumers and investors are necessary to harness the potential benefits and opportunities of crypto-asset innovation.”
Congress voted to repeal the SEC bulletin in a resolution, H.J. Res. 109, which passed the House in a vote of 228-182. A week later, the Senate followed suit, passing the resolution 60 to 38 vote.
The repeal measure was a largely Republican effort, but 21 Democrats did back the resolution, while several Democratic senators, including Senate Majority Leader Chuck Schumer (D-NY) also voted in favor of repealing SAB 121.
In terms of what happens next, overturning last week’s Presidential veto is possible but requires a two-thirds majority from both houses of Congress, so SAB 121 repealers would need to persuade a few more colleagues in both Houses to counteract Biden’s decision.
The controversial SAB 121
In March 2022, the SEC released Staff Accounting Bulletin 121 (SAB 121), the policy guideline that outlined, for the first time, how virtual asset service providers (VASPs) must handle accounting for digital assets.
SAB 121 contained strict ‘guidelines’ for institutions looking to custody digital assets. Among other things, it dictated that VASPs must record a liability and a corresponding asset on their balance sheets at fair value for users’ digital assets in their custody. In other words, VASPs must maintain their users’ digital asset holdings on their own balance sheets.
The bulletin was swiftly condemned by the industry, regulators, and lawmakers—primarily ‘pro-innovation’ Republicans—for discouraging digital asset adoption by traditional finance institutions and as a further attempt by the ‘anti-crypto’ lobby to keep a lid on the sector’s growth.
On May 8, the House of Representatives voted on a joint resolution put forward by Rep. Mike Flood (R-NE), H.J. Res. 109, to express formal disapproval of SAB 121. The resolution passed with relative ease.
The very same day, the Executive Office of the President’s Office of Management and Budget (OMB) issued a statement on the House Republican effort to repeal SAB 121, making it clear that Biden “strongly opposes” it.
However, Executive disapproval didn’t stop the Senate from following in the House’s footsteps and likewise passing H.J. Res. 109.
Veto warning
The OMB “Statement of Administration Policy” noted, in no uncertain terms, that SAB 121 “was issued in response to demonstrated technological, legal, and regulatory risks that have caused substantial losses to consumers.” As such, “if the President were presented with H.J. Res. 109, he would veto it.”
President Biden’s office said that “limiting the SEC’s ability to maintain a comprehensive and effective financial regulatory framework for crypto-assets would introduce substantial financial instability and market uncertainty.”
So, last Friday’s veto should be no surprise to observers and lawmakers alike.
The SEC has also commented on the criticism SAB 121 received, calling the bulletin “non-binding staff guidance” that strengthens disclosures to investors.
In a statement published earlier this year, an SEC spokesperson said:
“Time and again we have seen crypto firms fail and watched as their customers lined up at the bankruptcy court in hopes of getting what they thought was legally theirs. We’ve also seen the risks to investors in firms that safeguard these assets when they are hidden off balance sheet. These disclosures provide investors important line of sight into the level of risk taken by crypto custodians.”
For now, it appears the SEC has got its way, and, short of a seemingly unlikely overturning of the veto, SAB 121 retractors will have to live with its accounting guidelines—at least until November.
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