Senate joins House to overturn SEC's crypto custody rule

Bloomberg News

WASHINGTON —The U.S. Senate passed a measure to nullify the Securities and Exchange Commission's guidance creating accounting standards for financial firms that hold crypto in custody.

The measure will now be sent to President Joe Biden's desk, though the president is expected to veto it.

Going into effect in 2022, the SEC's SAB 121 directs the majority of SEC-registered companies holding crypto assets on behalf of clients to record that risk on the custodian's balance sheet as a liability.

The resolution to overturn the SAB 121 — introduced in the House by Republican Mike Flood  of Nebraska — utilizes a law known as the Congressional Review Act to attempt to overturn the SEC guidance. The Congressional Review Act allows Congress to nullify federal agency actions that meet the CRA's definition of a "rule" with simple majorities in Congress and the signature of the President. The president's veto can be overridden by two-thirds majorities in both chambers. 

The House voted to advance the resolution with a 228-182 vote, with 21 Democrats voting in favor. Despite receiving bipartisan support in both chambers, the measure passed the Senate with a 60-38 vote, well short of the 67 votes needed to override a veto. 

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Lawmakers from both parties — and even notable Democrats — have expressed disapproval with the SEC guidance. Senate Majority Leader Chuck Schumer, D-N.Y., joined other Democrats in supporting the measure Thursday. House Financial Services Committee Chair Patrick McHenry, R-N.C. has also criticized SAB 121 saying it effectively makes custodying customer crypto cost-prohibitive for financial firms.

Financial industry trade groups like the American Bankers Association echoed the GOP  leader's sentiment, saying it would place an undue burden on banks. 

"SAB 121 represents a significant departure from longstanding accounting treatment for custodial assets and threatens the industry's ability to provide its customers with safe and sound custody of digital assets," the ABA and three other banking associations said. "Other, nonbank digital asset platforms subject to SAB 121 are not required to meet the same capital, liquidity, or other prudential standards as banks and therefore do not face the economically prohibitive implications of SAB 121."

Progressive democrats like Rep. Maxine Waters, D-Calif., — the ranking member of the House Financial Services Committee — strongly opposed the resolution. Waters has argued SAB 121 is crucial for ensuring transparency and proper accounting for companies that provide custody services, could prevent fraud and protects investors by requiring companies to disclose and accurately report the value of crypto assets they hold. 

President Biden has previously said he would veto the measure. The White House warned that limiting the SEC's regulatory capabilities could present risks to the financial system.