House Finance Committee votes to move forward with measure to overturn SEC's custody bulletin

The SEC's Staff Accounting Bulletin No. 121, dubbed SAB 121, has drawn controversy over the past year over concerns in the crypto industry that it could prevent banks from custodying digital assets. The bulletin requires firms that custody crypto to record customer crypto holdings as liabilities on their balance sheets. 

Rep Mike Flood, R-Neb., who introduced the resolution, said for that banks, custodial assets, including securities, are always considered "off balance sheet" items. The two-page resolution, which was introduced by Flood and Rep. Wiley Nickel, D-N.C., earlier this month, would repeal the bulletin. 

"The ramifications of requiring banks to hold these assets on balance sheets are pretty significant," Flood said on Thursday during a markup hearing. "If a bank were to custody digital assets according to the parameters of SAB 121 the on balance sheet treatment would affect their other regulatory obligations like their capital and liquidity requirements. The end result is that banks must choose to either custody digital assets thus inflating their balance sheet and severely affecting every other line of business or stay entirely out of the market."

House lawmakers voted 31-20 to advance the measure, which would still need to go before the full House and eventually onto the Senate. Sen. Cynthia Lummis, R-Wyo, has also introduced a companion measure in the Senate.

Other concerns

Flood also said SAB 121 could affect spot bitcoin exchange-traded funds, which were just approved by the SEC a month ago. Due to SAB 121, banks won't be able to be custodians for those ETFs, Flood said. 

"That's a situation where you might want more bank custodians who are well regulated experts on custody, on the job," Flood said. 

However, top Democrat Maxine Waters, D-Calif., said the bulletin gave the crypto industry the clarity it has been asking for. 

"The crypto industry has long complained about the lack of clarity from the SEC when it comes to crypto and how the SEC supposedly only regulates crypto through enforcement rather than through regulation," Waters said on Thursday. "Notably this guidance was offered to protect investors against the mishandling of customer crypto assets by custodians — a practice that was at the core of FTX's spectacular collapse when billions of crypto assets went missing." 

Waters also noted that if the resolution is signed into law, it could have a "chilling effect" on the SEC's ability to issue more guidance on any issue in the future. 

Secret Service bill

The House Financial Services Committee also voted unanimously on Thursday to advance a bill that would clarify the U.S. Secret Service's authority over criminal activity involving digital assets.