U.S. Senate Rejects SEC’s Crypto Accounting Rule But Biden May Veto The Vote

The U.S. Senate passed a resolution seeking to overturn an accounting rule decreed by the Securities and Exchange Commission (SEC) that could have disastrous implications for financial institutions providing cryptocurrency custody services.

On May 16, the Senate voted 60 to 38 in favor of repealing the SEC’s Staff Accounting Bulletin (SAB) No. 121. The resolution, H.J. Res. 109, garnered bipartisan support, with 11 Democrats joining all but two abstaining Republican senators to reject the rule despite Democratic party leaders opposing the resolution.

“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,” the White House said in a statement published on May 8. “If the President were presented with H.J. Res. 109, he would veto it.”

The move follows the U.S. House of Representatives similarly voting to pass the resolution with a count of 228 to 182 on May 8, 2023, with 21 Democrats backing the resolution. However, the vote fell short of the two-thirds majority needed to override a presidential veto.

Should the President issue a veto, the legislation will return to Congress and would require a two-thirds majority vote in favor to pass.

Stifling innovation or protecting consumers?

On April 11, 2022, the SEC released SAB 121, mandating that companies offering custody services for crypto assets must include these assets on their balance sheets. The bulletin was widely panned by industry advocates and Republican lawmakers, with the rule posing major capital and accounting complications for banks working with crypto clients.

Following the passage of H.J Res. 109, Republican Senator, Cynthia Lummis slammed the SEC for seeking to legislate “an industry they do not regulate” through an SAB.

“This is a win for financial innovation and a clear rebuke of the way the Biden administration and Chair Gary Gensler have treated crypto assets and marks the first time both chambers of Congress have passed standalone crypto legislation,” Lummis said.

Republican Representative, Wiley Nickel, took aim at the SEC’s effort to bypass its formal rulemaking process in an attempt to regulate the U.S. cryptocurrency industry.

"Today's Senate vote to repeal SAB 121 sends a clear bipartisan message: Congress will not stand idly by as Gary Gensler and the SEC deliberately sidestep the statutory rulemaking process and overstep their regulatory authority,” Nickel said.

Blockchain Association, a crypto advocacy organization, also urged the Whitehouse to take note of the “overwhelming” bipartisan support for the resolution.

“The threat of a presidential veto denies the fact that there is a growing awareness… that crypto is something our elected officials should care about,” Blockchain Association tweeted. “Consumers shouldn’t be punished simply for embracing new technologies.”

Across the floor, Democratic Representative, Stephen Lynch, described the resolution as enabling financial institutions to conceal “risky banking practices” from the public. “[H.J. Res. 109 would] make it harder for customers and investors to understand whether crypto companies and banks are holding volatile assets while limiting transparency and increasing the ability to commit fraud,” Lynch said.

During debates leading up to the vote, Democratic Senator, Elizabeth Warren, said SAB 121 provided requisite protections for consumers.

"We have seen multiple hacks of crypto platforms,” Warren said. “The unique risks of crypto can create liabilities that seriously impact a company's financial condition. SAB 121 simply clarifies how companies should account for those risks in their financial disclosures.”

The resolution now hangs in the balance as lawmakers and industry stakeholders await President Biden's decision.