US lawmakers claim SEC accounting policies put crypto customers at risk

by · March 3, 2023

Two US lawmakers have criticized crypto accounting guidelines outlined by the national securities regulator, claiming they put crypto customers at greater risk of loss.

The guidelines came from the United States Securities and Exchange Commission and came into force in April last year.

The guidelines ask financial firms that hold crypto for clients to recognize any digital assets they do not control as a liability. They also say that digital assets should be backed by a means of protection.

However, Senator Cynthia Lummis and Representative Patrick McHenry argued on March 2 that these guidelines would “likely” discourage regulated entities from engaging in digital assets, which is the opposite effect of what the regulator should be doing.

In a letter to ranking individuals with the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Administration, the lawmakers argued that while Staff Accounting Bulletin (SAB) 121 was intended to provide clarity on the accounting treatment of digital assets, it had negative side effects. They wrote:

“SAB 121 puts client assets at greater risk of loss if a custodian becomes insolvent or goes bankrupt, violating the SEC’s fundamental mission of protecting clients.”

The lawmakers argue that the effect of SAB 121 would be to “deny millions of Americans access to safe and secure custody arrangements for digital assets.”

The lawmakers also disagreed with the “breadth of the definition of ‘digital asset’ in SAB 121,” arguing that “a more nuanced hierarchy for this asset class that considers the opportunities and risks of digital assets with different functions is needed.”

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Lawmakers, including Lummis, have raised an uproar over the SEC accounting bulletin in the past.

Last year, five Republican senators, including Lummis, sent a letter to the SEC on June 16, sharing their concerns that the bulletin constituted “regulations disguised as staff guidance” and did not follow the Administrative Procedure Act.

SEC Commissioner Hester Peirce shared similar concerns on March 31, shortly after the bulletin was released, noting that it was “the way the change is made” rather than the accounting decision itself that she took issue with. She characterized the change as:

“Another manifestation of the Securities and Exchange Commission’s scattered and ineffective approach to crypto.”