Republican Lawmakers Urge SEC to Rescind Controversial Crypto Rule, Again

On Monday, a group of over 40 Republican lawmakers sent a letter to U.S. Securities and Exchange Commission Chairman Gary Gensler, once again urging the agency to rescind its controversial crypto custody rule.

The letter, led by House Financial Services Committee Chair Patrick McHenry, Senator Cynthia Lummis, and 40 other bipartisan lawmakers, comes after Congress passed a bipartisan repeal of  Staff Accounting Bulletin No. 121 (SAB 121), which President Joe Biden later vetoed. 

The SEC’s lack of clearer crypto rules has become a central issue among critics who argue the agency is pursuing a regime of regulation via litigation. SAB121, meanwhile, has been under fire since its implementation in March 2022, with critics stating it disrupts traditional accounting standards and puts unnecessary pressure on financial institutions.

Lawmakers also argue that SAB 121, which requires crypto custodians to recognize digital assets as liabilities on their balance sheets, could increase consumer risks, weaken financial innovation, and discourage banks from offering custodial services for cryptocurrencies.

SAB 121 “deviates from established accounting standards, would fail to accurately reflect the underlying legal and economic obligations of the custodian, and place consumers at a greater risk of loss,” the politicians wrote in their letter. 

The rule was originally designed to address the risks associated with holding digital assets, but its detractors argue it has the opposite effect. 

They claim it stifles innovation by pushing crypto custody into the hands of non-bank entities, which they believe could lead to more concentrated risks in the industry.

SAB 121's critics have also accused the SEC of bypassing the Administrative Procedure Act, which requires a formal notice-and-comment period for new regulations.

The letter noted the lack of transparency surrounding SAB 121’s implementation, stating the SEC has reportedly worked with certain institutions privately to help them avoid compliance.  The regulator did not immediately return a request for comment.

Although President Biden vetoed a previous resolution to repeal SAB 121 in June, citing concerns about financial stability and investor protection, the issue remains contentious. 

The U.S. House of Representatives attempted to override President Biden's veto on July 10, 2024, but failed to reach the necessary two-thirds supermajority.

The vote saw 207 Republicans and 21 Democrats in favor of the repeal, falling short of the required threshold. The same voting pattern had emerged in May when the bill first came to a vote.

Ultimately, 183 Democrats voted against the measure, preventing the override and marking a major setback for the repeal effort. That has further angered those already at odds with the regulator’s perceived stance against the industry.

In a recent federal court hearing, a panel of judges skewered the SEC’s attorneys over the agency’s refusal to issue specific rules for crypto tokens, raising concerns about the SEC’s longstanding approach of “regulating by enforcement” through sporadic lawsuits.

The judges expressed frustration over the SEC’s inability to clarify whether major cryptocurrencies like Bitcoin and Ethereum fall under securities regulations.

In a separate case, cryptocurrency exchange Kraken has also responded to an SEC lawsuit by demanding a jury trial, arguing that the SEC has failed to provide clear regulatory guidance on which crypto assets qualify as securities.

Edited by Sebastian Sinclair