Allegations of SEC's Violation of Law Regarding Cryptocurrency Accounting Regulation

The Government Accountability Office (GAO) Declares SEC’s SAB 121 Must Be Reviewed by Congress

The Government Accountability Office (GAO) has stated that the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 121 (SAB 121) must undergo congressional review before it can take effect. This decision sets the stage for a confrontation between regulators, lawmakers, and the growing crypto industry.

SAB 121, issued in March 2022, requires firms that hold cryptocurrency to record customer holdings as liabilities on their balance sheets. The SEC claims that this bulletin is meant to address risks specific to crypto. However, critics argue that it burdens companies unnecessarily and distorts financial disclosures.

The GAO, a non-partisan federal agency, confirmed that SAB 121 falls under the scope of the Congressional Review Act (CRA), which allows Congress to oversee agency rulemaking and potentially disapprove rules within 60 days. The SEC’s claim that the bulletin does not meet the definition of a rule has been negated by the GAO.

The Crypto Industry Responds

Members of the crypto industry swiftly reacted to the GAO’s declaration. Jake Chervinsky, Chief Legal Officer at Variant venture fund, accused the SEC of breaking the law and called for an immediate withdrawal of SAB 121.

This is huge.

The GAO reviewed SAB 121, an illogical anti-crypto accounting bulletin issued by the SEC last March, and found that it’s a “rule” under the CRA and APA.

The SEC didn’t comply with either.

This is a clear statement from a federal agency that the SEC broke the law. https://t.co/brglK3sm8S

— Jake Chervinsky (@jchervinsky) October 31, 2023

Cody Carbone, Vice President of Policy at the Chamber of Digital Commerce, hailed this development as a victory for clear and fair custody rules for digital assets.

Wow. The GAO has concluded that SAB 121 is not merely a bulletin, but an agency rule. Here is what it means:

1) SEC failed to comply with the law – Congressional Review Act (CRA)

2) The CRA states that all agency rules, unless an exception applies, must be submitted to both… https://t.co/6l1Dcv0gCK

— Cody Carbone (@CodyCarboneDC) October 31, 2023

Bipartisan Bill on the Horizon

A bipartisan group led by U.S. Congressman Mike Flood has introduced the Uniform Treatment of Custodial Assets Act, which prohibits federal agencies from requiring assets held in custody to be recorded as liabilities. Rep. Flood argues that SAB 121 would prevent banks from providing custodial services for digital asset investors.

“The SEC’s SAB 121 would prevent banks from providing custodial services to digital assets investors by requiring them to keep those assets on-balance sheet,” said Rep. Flood.

Lawmakers have a 60-day window to review and potentially disapprove SAB 121. This period is expected to be a pivotal moment for regulatory discussions on crypto, with lobbyists from various sides vying for the attention of lawmakers. The SEC has not yet responded, but the outcome of this battle holds significant implications.

Hot Take: High-Stakes Showdown Looms Between Regulators and Crypto Industry

The Government Accountability Office’s declaration that the SEC’s SAB 121 must be reviewed by Congress sets the stage for a high-stakes showdown between regulators, lawmakers, and the growing crypto sector. This decision comes after swift reactions from the crypto industry, with some accusing the SEC of breaking the law and calling for the immediate withdrawal of SAB 121. Additionally, a bipartisan bill has been introduced that aims to prohibit federal agencies from requiring assets held in custody to be recorded as liabilities. As lawmakers have a limited time frame to review and potentially disapprove SAB 121, the next 60 days will be crucial for the regulatory landscape of the crypto industry.