Congressional Disapproval of SAB 121 Vetoed

On May 31, 2024, the President vetoed H.J.Res 109, which evidenced the disapproval by Congress of Staff Accounting Bulletin 121 of the Securities and Exchange Commission. This followed several years of industry and bipartisan efforts in Congress to blunt the effect of or nullify the rule.

On its face, SAB 121 is fairly innocuous. Crypto assets held in custody by an SEC reporting company for its clients must be reported both as an asset and as a liability on its balance sheet. From an accounting perspective, this is balance sheet neutral since the asset and liability cancel each other out.

For regulated banks that want to expand their traditional client custody business from securities and other financial assets to crypto, this is a departure from the standard accounting treatment that can be prohibitively expensive. Assets held in custody are usually balance sheet neutral to a bank since they belong to the bank’s customers and are not included on the bank’s balance sheet. Adding the asset and subtracting it as a liability is mathematically neutral. However, treating crypto in custody as a liability of the bank triggers the minimum capital requirements that banks are required by regulators to maintain to manage investment risk and prevent a collapse if there is a run on the bank.

Why did the SEC change the rule for crypto assets in custody? Did they have the authority to do so? Why does it apply to banks? We discuss these and other questions in our recent Alert.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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