U.S. House Panel Votes to Disapprove of Controversial SEC Custody Guidance

A majority of the U.S. House Financial Services Committee voted in favor of a resolution seeking to eliminate the Securities and Exchange Commission's Staff Accounting Bulletin 121 – commonly referred to as SAB 121 – a controversial piece of guidance that directs financial institutions to hold customers' crypto assets on their own balance sheets.

During an abbreviated committee markup Thursday, Chairman Patrick McHenry (R-N.C.) said a majority of members voted in favor of the bipartisan resolution, though a formal vote was postponed to the end of the markup. During the vote, 31 lawmakers from both parties voted in favor of the resolution, with 20 lawmakers voting against. Every member also voted in favor of a bill that would give the U.S. Secret Service greater resources to investigate crypto-related illicit activity and cybercrimes.

The Government Accountability Office argued the guidance should have been treated as a more formal rule, meaning it should have gone through a different approval process. The GAO review did not change the bulletin's effects.

Read more: U.S. SEC's Knock From Congressional Watchdog May Not Budge Crypto Accounting Policy

Rep. Michael Flood (R-Neb.), one of the resolution's sponsors, said his issue with the guidance is that it "prevents banks from effectively ever" custodying digital assets.

"The end result is that banks must choose to either custody digital assets, thus inflating their balance sheet and severely affecting every other line of business, or stay entirely out of the market. That's not much of a choice at all," he said.

This is an especially acute issue given the recent SEC approval for spot bitcoin exchange-traded funds (ETFs), he said. The main custodians for existing ETFs – Coinbase, Gemini, Fidelity and BitGo – are non-banks.

Rep. Maxine Waters (D-Calif.), the ranking member on the House panel, took a less sympathetic stance toward the crypto industry, saying the guidance "was offered by SEC staff to provide industry with the clarity they asked for."

She pointed to FTX's 2022 collapse as an example of why there should be greater guidance for custodians. More importantly, she pointed to a quirk of the Congressional Review Act: That overturning the guidance would block the SEC from returning to the topic in future.

The Congressional Review Act lets Congress effectively erase recently approved rules from federal regulators. If the lawmakers advance the rejection of the SEC's accounting policy through the committee, it would then head toward a potential floor vote in the House. An approval in the House would still have to be matched in the Senate before the policy would formally be scrapped, and that chamber hasn't yet shown any signs of movement on the securities agency's controversial bulletin. Sen. Cynthia Lummis (R-Wyo.) introduced the Senate counterpart to the House resolution in her chamber.

Rep. Wiley Nickel (D-N.C.), another sponsor of the resolution, echoed his Nebraska counterpart in saying the guidance prevented banks from custodying digital assets, but argued this is actually more harmful for crypto investors.

"Whether you support crypto or not, you should want the most heavily regulated financial institutions," he said. "They're experts in custodial banking to safeguard assets. Otherwise, people will have to turn to riskier, unregulated options putting both consumers and the financial system [at risk]. We're seeing this issue with SAB 121 play out in real time."

In a statement, an SEC spokesperson said, "SAB 121 is non-binding staff guidance that, if followed, enhances important disclosure to investors in firms that safeguard crypto assets for others. Time and again we have seen crypto firms fail and watched as their customers lined up at the bankruptcy court in hopes of getting what they thought was legally theirs. We’ve also seen the risks to investors in firms that safeguard these assets when they are hidden off balance sheet. These disclosures provides investors important line of sight into the level of risk taken by crypto custodians."

Lawmakers also debated another bill, the Combating Money Laundering in Cyber Crime Act, that would grant the U.S. Secret Service greater resources to investigate cyber crimes, including crypto involvement. Rep. Zach Nunn (R-Iowa), one of the bill's cosponsors, said cyber crimes have led to hundreds of billions of dollars lost – and the total cost may exceed $11 trillion.

"The Combating Money Laundering and Cyber Crime Act significantly strengthens the U.S. Secret Service's ability to investigate the full spectrum of cyber crimes without compromising the innovation in the space," he said. "This is a bipartisan bill and it closes the gap to empower our Secret Service professionals to continue to investigate cyber criminals including cases involving digital assets, not just your home, but around the globe."

The bill "addresses gaps in our ability to investigate illicit crimes using digital assets," said Rep. Gregory Meeks (D-N.Y.), one of the effort's backers. "As financial criminals increasingly, persistently look to utilize digital assets in this work, this legislation allows us to better equip those investigating and preventing it."

The bill "allows us to better address threats from nations like and including Russia and North Korea," Meeks said. "By expanding the scope of U.S. Secret Service investigations and bringing digital assets in line with other fungible property used to commit crimes, what this bill does, it brings another element of protection and defense in line with the 21st century."

Though McHenry said he hoped to begin votes by 12:30 p.m. ET, ahead of a full House vote scheduled for 1:30 p.m. ET, lawmakers were still discussing one of the bills on the agenda at a quarter to 1. The first vote, on the SAB 121 resolution, began shortly before 1:00 p.m.

UPDATE (Feb. 29, 2024, 18:00 UTC): Updates to record vote on the SAB 121 resolution.

UPDATE (Feb. 29, 2024, 18:10 UTC): Adds vote count on cyber crime act.

UPDATE (Feb. 29, 2024, 18:30 UTC): Formatting, adds summary notes at top.

UPDATE (Feb. 29, 2024, 18:45 UTC): Fixes inadvertent word.

UPDATE (Feb. 29, 2024, 21:32 UTC): Adds SEC statement.