SAB 121 Faces Criticism: Bipartisan Effort to Revoke Controversial Bulletin

US President Joe Biden vetoed the repeal of Staff Accounting Bulletin 121 (SAB 121) in June. However, the debate surrounding this regulation continues to intensify.

Fast forward to July, and the legislation resurfaces in Congress as officials aim to gather ample support for an overriding majority.

Call for SEC to Retract SAB 121 from Republicans

Amid these developments, Senator Cynthia Lummis and House Financial Services Committee Chairman Patrick McHenry have urged the US Securities and Exchange Commission (SEC) to withdraw SAB 121.

A joint letter dated 23rd September, signed by Lummis, McHenry, and 40 other legislators, raised concerns over the bulletin, citing issues with custody rules linked to cryptocurrencies, reduced consumer safeguards, and stifled financial innovation.

The lawmakers argue that SAB 121 was enacted without involving prudential regulators, mandating custodians to recognize a liability while also retaining a corresponding offset on their balance sheets based on the fair value of the customer’s digital assets.

Expressing their disapproval, the lawmakers stated,

“This unconventional accounting method, divergent from established standards, fails to accurately represent the custodian’s true legal and financial obligations, increasing consumer vulnerability to potential losses.”

Reasons for the Initiative

The correspondence highlighted the authors’ belief that SAB 121 was implemented without adequate consultation with relevant regulators or adhering to the notice and comment process mandated by the Administrative Procedure Act (APA).

The Government Accountability Office (GAO) reviewed SAB 121 and categorized it as a formal regulation, leading to a heated debate on the SEC’s decision to adopt it as staff guidance.

To strengthen their stance, the lawmakers reiterated,

Industry Leaders Weigh In

In a letter dated 15th May to Chair Gensler, Democrat Wiley Nickel criticized the regulator for deviating from its investor protection mandate and overstepping its authority by proposing SAB 121.

Furthermore, Congressman Ritchie Torres also expressed his opinion.

Future Prospects for Gensler and SAB 121

Coinciding with the efforts to revoke Staff Accounting Bulletin 121 is Gensler’s scheduled testimony before Congress on the 24th and 25th of September.

Legislators plan to address pressing questions regarding the agency’s enforcement approach in the digital asset sector during these hearings.

The discussions will not only focus on the implications of SAB 121 but will also shed light on broader issues surrounding the SEC’s cryptocurrency regulation strategy, highlighting intensified scrutiny of the agency’s policies.

With the election looming just 41 days away, the potential outcome could substantially influence regulatory leadership. Should Donald Trump secure victory, he may proceed with Gary Gensler’s removal. Conversely, a win for Kamala Harris could result in Gensler’s nomination for Treasury Secretary.