Dems Join Crusade to Overturn Contentious SEC Crypto Accounting Guidance

Several House Democrats have thrown their support behind a congressional effort to overturn controversial accounting guidance that affects how regulated banking organizations account for and safeguard their customers’ digital assets. The development is breathing new life into an effort that some cryptocurrency supporters feared was dead earlier this year.

The guidance causing the ruckus was originally released by the Securities and Exchange Commission in March 2022 in the form of Staff Accounting Bulletin No. 121. It said SEC-regulated entities that perform certain digital asset custodial activities and maintain crypto key information for their customers should include crypto-asset safeguarding liabilities and related assets on their balance sheets at fair-market value. The SEC said these “arrangements” involve unique technological, legal and regulatory risks and uncertainties that warrant financial institutions reporting the “custodied crypto assets” as liabilities on their balance sheets.

The bulletin’s contents prompted immediate backlash – particularly from the banking industry, crypto advocates and lawmakers on Capitol Hill. Opponents complained the guidance was a departure from traditional custodial practices, and they said it would undermine the business case for custody banking. They also argued that it might introduce new costs and risks for financial entities and investors. In a February 2024 letter to SEC Chair Gary Gensler, a coalition of banking associations wrote that experiences over the past two years showed SAB 121 curbed the ability of their “members to develop and bring to market at scale certain digital asset products and services.”

“If regulated banking organizations are effectively precluded from providing digital asset safeguarding services at scale, investors and customers, and ultimately the financial system, will be worse off, with the market limited to custody providers that do not afford their customers the legal and supervisory protections provided by federally regulated banking organizations,” they wrote.

Amid the threat of a veto by President Joe Biden, the House in May advanced a measure introduced by Reps. Mike Flood (R-Nebraska) and Wiley Nickel (D-North Carolina) calling for the repeal of SAB 121. Later that month, the Senate passed the resolution by a 60-38 vote. That set the stage for Biden to make good on his promise to kill the resolution.

“My Administration will not support measures that jeopardize the well-being of consumers and investors,” Biden said in a statement on his decision to veto the resolution. “Appropriate guardrails that protect consumers and investors are necessary to harness the potential benefits and opportunities of crypto-asset innovation.”

However, that wasn’t the final word on SAB 121’s fate. After an effort to override Biden’s veto failed, a different bill with the same upshot was introduced last month by a bipartisan group of House lawmakers. At least five additional Democrats in the House have decided to join the original handful of supporters from their side of the aisle who are backing the new legislation.

Whatever the outcome of the current push to strike down SAB 121, the debate about regulating the crypto industry will remain a point of political contention. The push from deep-pocketed donors such as David Sacks, Peter Thiel and Elon Musk to add Ohio Senator J.D. Vance as the running mate of Republican Presidential nominee Donald Trump speaks to the desire in Silicon Valley to entrench digital assets as more than a funky niche in the global economy. Even if the Trump-Vance ticket doesn’t emerge victorious in November, the Democratic administration will still face a bevy of questions about crypto’s future.