The recent surge in popularity of cryptocurrencies has led to a debate surrounding their regulation and safekeeping. At the heart of this debate lies the issue of crypto custody i.e. storing and managing digital assets on behalf of individuals or institutions. In February 2024, the US House Financial Services Committee took a significant step by advancing a resolution that could possibly reshape the landscape of crypto custody.
The Controversy- SAB 121 and its Implications
The resolution aims to disapprove of Staff Accounting Bulletin No. 121 (SAB 121), a set of guidelines issued by the Securities and Exchange Commission (SEC) in March 2022. This bulletin mandates that institutions holding crypto assets for clients must record them as liabilities on their balance sheets. This requirement has been met with strong opposition, particularly from the banking industry.
Arguments against SAB 121
Proponents of the resolution, including Congressman Mike Flood (R-Neb.), argue that SAB 121 discourages banks from entering the crypto custody market. They argue that treating custodial assets as liabilities on the balance sheet significantly impacts banks’ other regulatory obligations, making it financially cumbersome for them to offer crypto custody services at scale.
The American Bankers Association (ABA) also supports the resolution, stating that the current policy diverges from the traditional practice of treating custody assets off-balance sheet. They believe this limits consumer options for storing their digital assets and ultimately exposes them to greater risks.
Additionally, some argue that SAB 121 represses innovation in the crypto space. Congressman Wiley Nickel (D-N.C.) emphasizes the importance of well-regulated institutions entering the crypto market to provide secure custody solutions for investors. He believes that forcing individuals to turn to unregulated alternatives poses a greater risk to the financial system.
The Other Side of the Coin
However, not everyone agrees with the resolution. Opponents, including Congresswoman Maxine Waters (D-Calif.), believe that the SEC’s guidance was intended to provide clarity to the crypto industry, which has historically faced criticism for a lack of transparency.
The SEC maintains that SAB 121 is non-binding staff guidance aiming to enhance investor disclosure. They argue that the recent failures of crypto companies highlight the risks associated with hidden off-balance sheet liabilities. Additionally, they believe this guidance provides investors with greater insight into the risk profile of crypto custodians.
What Lies Ahead
The House committee also discussed a separate bill, the Combating Money Laundering in Cyber Crime Act, aiming to provide the Secret Service with more resources to investigate cybercrimes involving digital assets. This further emphasizes the growing concern surrounding crypto-related criminal activities and the need for effective law enforcement measures.
The resolution still faces an uphill climb. It needs to be approved by both the House and the Senate before taking effect. Additionally, even if passed, the SEC might attempt to issue similar guidance in the future.
This complex scenario highlights the ongoing dialogue surrounding crypto regulation in the US. While some advocate for greater freedom and innovation, others are pushing for consumer protection and financial stability. Ultimately, navigating this new territory will require careful consideration of all perspectives and their potential implications.
Celine Brooks is a renowned journalist and author specializing in cryptocurrency and blockchain technology. She holds a Master’s degree in Economics from Harvard University and is very passionate about Crypto. Celine regularly hosts webinars and workshops, sharing her insights and forecasts about the evolving digital currency landscape. She is also an active contributor to several leading financial and tech publications, where she breaks down complex crypto trends into understandable insights for everyday investors.