House Committee Moves to Overturn SEC Crypto Custody Rule

The House Financial Services Committee has opposed the proposed Securities and the Exchange Commission(SEC) Staff Accounting Bulletin 121(SAB 121), a regulation that has become a heated ‘bone of contention’ between the financial and cryptocurrency groups. Consequently, the committee’s vote to advance a resolution disapproving of SAB 121 marks a significant step towards altering the landscape of crypto asset custody in the United States.

Bipartisan Support Against SEC Guidance

The resolution, led by Rep. Michael Flood, challenges the SEC’s directive that compels financial institutions to include customers’ crypto assets on their balance sheets. According to critics, this position burdens the banks desiring to participate in digital asset custody, as it inflates their balance sheets and affects their other lines of business. 

.@GaryGensler is violating the SEC’s statutory mission with SAB 121.

We must pass @USRepMikeFlood's resolution so Chair Gensler’s illegal rule ceases to be in effect.

See my remarks on the resolution below. pic.twitter.com/cn8HQV2cAb

— Tom Emmer (@GOPMajorityWhip) February 29, 2024

Counting the votes the House Financial Services Committee cast, the bill to stop the SEC from approving the contentious guidance has bipartisan support, with more supporters than opposers.

The Impact of SAB 121 on Financial Institutions

The committee’s critique of SAB 121 centers on its perceived limitations on banks’ ability to custody digital assets. According to Rep. Flood, this rule forces banks into a difficult choice: either to engage in the custody of digital assets at the expense of their balance sheet health or to avoid the crypto market altogether. This dilemma is particularly pressing in light of the SEC’s recent approval of spot bitcoin exchange-traded funds (ETFs), which rely on non-bank custodians like Coinbase, Gemini, Fidelity, and BitGo.

The resolution’s progress through the committee is the first stage in several legislative obstacles. For the disapproval to take effect, it must be ratified by the House and Senate. The Congressional Review Act (CRA) serves as the legal basis for this move, allowing Congress to nullify recently enacted regulatory rules.

Most importantly, a ruling in favor of the CRA will prevent the SEC from implementing similar orders, which means that this case can be seen as a precedent for the Commission in similar future actions.

Enhanced Resources for Crypto Crime Investigation

Aside from the resolution against SAB 121, the committee passed a bill that aimed to reinforce the investigative powers of the U.S. Secret Service when it came to crypto-related crimes. This law, the Combating Money Laundering in Cyber Crime Act, clearly illustrates the heightened anxiety about crypto being used in illegal transactions. 

By providing the Secret Service with enhanced resources, the bill aims to strengthen the United States’ defense against cyber crimes, including those involving cryptocurrencies, thus protecting consumers and the financial system’s integrity.

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