Congressman Alleges SEC Misuse of SAB 121 to Crack Down on Crypto Custody Providers

• Congressman Ritchie Torres criticizes the SEC’s SAB 121 rule for violating accounting principles and stifling crypto innovation.  
• SAB 121 requires crypto companies to list customer assets as liabilities, increasing regulatory scrutiny on financial institutions.  
• BNY Mellon received an exemption from SAB 121, enabling it to enter the crypto custody market amid rising regulatory challenges.

The U.S. Securities and Exchange Commission (SEC) is under criticism over the contentious Staff Accounting Bulletin 121 (SAB 121) rule.  United States Congressman Ritchie Torres has expressed his disapproval, claiming that the SEC’s implementation of SAB 121 breaches accounting standards and jeopardizes innovation in the cryptocurrency sector. 

SAB 121, which went into effect in March 2022, requires cryptocurrency businesses to include customer crypto assets as liabilities on their balance sheets. Industry participants are worried about this requirement.

The SEC has a policy, known as SAB 121, that requires banks to put custodial assets on their own balance sheets—in violation of generally accepted accounting principles.

The SEC is effectively ordering companies not to experiment with blockchain technology. There is… pic.twitter.com/VbI8O442mu

— Rep. Ritchie Torres (@RepRitchie) September 20, 2024

SAB 121 Rule Under Scrutiny

Notably, in Torres’ opinion SAB 121 deviates from generally accepted accounting principles (GAAP). The regulation, which mandates that cryptocurrency businesses give thorough disclosures regarding the custody of their digital assets, has sparked worries about heightened regulatory scrutiny. 

Furthermore, banks have been impacted because of increased regulatory pressure as a result of the SEC’s recent request that financial institutions disclose cryptocurrency custody on their balance sheets. This has led to an increasing divide between the SEC and proponents of blockchain technology development.

Besides, a major source of disagreement has been the SAB 121 rule, which many in the cryptocurrency community have labeled as contentious. Torres continued, saying that several business executives agreed that the SEC’s actions are hindering innovation. 

Moreover, the congressman stated that it is inconsistent with American values to forbid blockchain technology experimentation, claiming that such actions could obstruct technological progress.

Crypto Custody Banks Face Regulatory Challenges

In addition to SAB 121, the Federal Reserve and other authorities have stepped up their examination of banks providing cryptocurrency custodial services. The SEC and the Federal Reserve have been putting increasing pressure on a number of financial institutions, including the now-bankrupt Silvergate Bank. 

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Consequently, analysts have noted that the industry is being forced into a corner by regulatory initiatives such as Operation Choke Point 2.0, which attempts to limit banks’ involvement in cryptocurrency.

Notably, United Texas Bank has been given ninety days to comply with Anti-Money Laundering (AML) standards after the Federal Reserve issued an order recently. Analysts and stakeholders are concerned about this increased scrutiny; some wonder why federally regulated banks are being singled out while others are still permitted to operate.

BNY Mellon Navigates SAB 121 Hurdles

There is still an influx of major players into the crypto custodial bank market, despite mounting pressure. One of the biggest banks in the US, BNY Mellon, was given permission to provide cryptocurrency custodial services. 

Additionally, the bank allegedly obtained an exemption from the rule by bypassing some of the difficulties posed by SAB 121. Notwithstanding the continuous regulatory obstacles, this development might open the door for more banks to join the cryptocurrency market.

Hence, uncertainty surrounds SAB 121’s long-term effects as more financial institutions attempt to negotiate the complexities of crypto custody regulations. While some banks find it difficult to comply, others might be able to thrive in the changing regulatory environment by adapting.

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