QUICK TAKE:

• U.S. banking lobbyists and Congress members urge Biden to reconsider vetoing the rejection of SEC’s crypto policy.
• SEC’s SAB 121 requires banks to include customers’ digital assets on their balance sheets, posing operational challenges.
• The pushback involves bipartisan efforts highlighting the potential negative impact on both banks and crypto companies.

Biden Faces Pressure to Reverse Veto on SEC Crypto Policy Rejection

In a significant move, lobbying groups representing major U.S. banks, alongside several members of Congress, have urged President Joe Biden to rethink his stance on vetoing the congressional resolution aimed at overturning the SEC’s controversial crypto accounting policy. This plea marks a rare alliance between Wall Street and the crypto industry, both advocating against the SEC’s Staff Accounting Bulletin No. 121 (SAB 121).

The Core Issue:

SAB 121 mandates that banks must record customers’ digital assets on their balance sheets. Critics argue this requirement disrupts the operational landscape, effectively barring regulated banking institutions from offering digital asset custody at scale. Unlike traditional custody, where assets are merely held, SAB 121 treats these digital assets as if they are owned by the bank, imposing stringent capital and liquidity requirements.

Banking Sector’s Standpoint:

Several influential banking groups, including the American Bankers Association and Financial Services Forum, expressed their concerns in a letter to Biden. They argued that the policy places an undue burden on banks, making it difficult to compete with non-bank crypto custodians. The letter emphasized that recording digital assets on balance sheets subjects banks to higher regulatory demands, creating an uneven playing field.

Congressional Support:

Senator Cynthia Lummis (R-Wyo.) and Representative Patrick McHenry (R-N.C.) led a bipartisan effort to persuade Biden to either avoid the veto or collaborate with the SEC to rescind SAB 121. They pointed out that rescinding or revising staff accounting bulletins is a common practice, citing ample precedents. The appeal was backed by seven other representatives, underscoring the widespread legislative support for overturning the SEC’s policy.

Implications of Biden’s Veto:

Biden’s potential veto is rooted in concerns about undermining the SEC’s authority to establish necessary guardrails for the crypto industry. The president argued that using the Congressional Review Act to nullify SAB 121 would prevent the SEC from implementing similar measures in the future, potentially compromising financial stability.

Senate Democrats’ Position:

Notably, 11 Senate Democrats, including Majority Leader Chuck Schumer (D-N.Y.) and Senate Finance Committee Chairman Ron Wyden (D-Ore.), broke ranks with the president. At the Consensus 2024 conference, Wyden criticized SAB 121 for creating a distinct standard for crypto assets, unlike any other financial sector regulation.

SEC’s Justification:

SEC Chair Gary Gensler defended SAB 121, stating it was a necessary response to the crypto market turmoil and investor losses experienced in 2022. He clarified that the bulletin aimed to address the mishandling of customer assets by failing crypto firms, ensuring these assets are not considered part of bankruptcy estates.

Conclusion:

President Biden faces a pivotal decision, with a deadline looming on Monday. The outcome will significantly influence the future regulatory landscape for both banks and the crypto industry. As the debate continues, the resolution’s fate remains uncertain, reflecting the complex intersection of financial regulation, innovation, and market stability.