SEC Accused of ‘Breaking the Law’: Congress and GAO Challenge SEC’s Controversial Crypto Accounting Rule

The post SEC Accused of ‘Breaking the Law’: Congress and GAO Challenge SEC’s Controversial Crypto Accounting Rule appeared first on Coinpedia Fintech News

The Government Accountability Office (GAO) declared on Tuesday that the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 121 (SAB 121) must be reviewed by Congress before taking effect. The directive from the federal watchdog sets the stage for a high-stakes showdown between regulators, lawmakers, and the burgeoning crypto sector.

Issued in March 2022, SAB 121 instructs firms that custody cryptocurrency to record customer holdings as liabilities on their balance sheets. According to the SEC, the bulletin aims to address crypto-specific risks. However, critics argue that the guidance creates an unnecessary burden on companies and may distort financial disclosures.

The Congressional Review Act (CRA), enacted in 1996, allows Congress to oversee agency rulemaking and, if necessary, disapprove rules within 60 days. The GAO, a non-partisan federal agency, confirmed that SAB 121 falls under the ambit of CRA, negating the SEC’s claim that the bulletin doesn’t meet the rule definition.

“We conclude the Bulletin is a rule for purposes of CRA because it meets the APA [Administrative Procedures Act] definition of a rule, and no exceptions apply. Therefore, the Bulletin is subject to the requirement that it be submitted to Congress,” the GAO stated.

The Crypto Industry Strikes Back

Reactions from the crypto world were swift and strongly worded. Jake Chervinsky, Chief Legal Officer at venture fund Variant, stated, “This is a clear statement from a federal agency that the SEC broke the law.” He urged the SEC to “immediately withdraw SAB 121.”

Cody Carbone, Vice President of Policy at the Chamber of Digital Commerce, called the development a “win for clear, fair custody rules for digital assets.”

Bipartisan Bill on the Horizon

Adding fuel to the fire, a bipartisan group led by U.S. Congressman Mike Flood introduced the Uniform Treatment of Custodial Assets Act. The legislation prohibits federal agencies from requiring assets held in custody to be included as liabilities.

“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 could be a boiling point for regulatory debates on crypto, with lobbyists from all sides vying for the ears of lawmakers. The SEC has yet to respond, but the stakes are sky-high.