A group of Republican senators on June 15, 2022, asked the SEC to withdraw its late March staff accounting bulletin on the accounting treatment of crypto assets for trading platforms and “follow the proper procedure for such a significant accounting change.” The letter reflects ongoing grievances among GOP lawmakers and industry over the Staff Accounting Bulletin (SAB) No. 121.
“If the Commission agrees the goals of SAB 121 are appropriate, we welcome a rulemaking to be issued through the proper notice and comment regime to allow for proper stakeholder engagement,” Sens. Bill Hagerty of Tennessee, Thom Tillis of North Carolina, Cynthia Lummis of Wyoming, Mike Crapo of Idaho, and Mike Rounds of South Dakota wrote in the letter to SEC Chair Gary Gensler.
All of the lawmakers are members of the Senate Banking Committee.
SAB No. 121 addresses entities with obligations to safeguard crypto assets held for platform users and the technological, legal, and regulatory risks associated with those arrangements. (See Investors Applaud SEC Stance on Accounting Treatment of Customers’ Cryptos as Commissioner Peirce Criticizes It in the April 11, 2022, edition of Accounting & Compliance Alert.)
Using a hypothetical crypto trading platform referred to as Entity A, staff concluded that as long as that entity is “responsible for safeguarding the crypto-assets held for its platform users, including maintaining the cryptographic key information necessary to access the crypto-assets, the staff believes that Entity A should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users.”
“As Entity A’s loss exposure is based on the significant risks associated with safeguarding the crypto-assets held for its platform users, the staff believes it would be appropriate to measure this safeguarding liability at initial recognition and each reporting date at the fair value of the crypto-assets that Entity A is responsible for holding for its platform users,” staff wrote in the bulletin. “The staff also believes it would be appropriate for Entity A to recognize an asset at the same time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of the crypto-assets held for its platform users.”
In a May letter to Lummis, the Securities Industry and Financial Markets Association (SIFMA) and Bank Policy Institute (BPI) argued regulated banks should be exempt from provisions of SAB No. 121, or the SEC should delay it. (See Industry Groups Seek Bank Exemption from SEC Guidance on Crypto Platform Accounting in the May 23, 2022, edition of ACA.)
The June 16 GOP letter goes a step further in urging the SEC to scuttle the accounting bulletin and start over with a formal notice-and-comment rulemaking under the Administrative Procedure Act (APA).
“Although the underlying interpretation may or may not be appropriate, as currently drafted, the SAB 121 is regulation disguised as staff guidance,” they wrote. “As you know, staff typically only provide interpretive guidance on existing regulations. Here, there is no underlying regulation being interpreted. Moreover, the Bulletin leaves no doubt that staff expects regulated entities to comply – indicating the Bulletin is enforceable. Staff guidance cannot create enforceable obligations. The SEC should not be taking steps that could invite litigation, which undermines the American people’s confidence in the agency, and in our shared desire to promote strong protections for investors.”
“Regardless of your next steps, please provide any economic analysis done on the potential impact of this bulletin – including the effect on capital requirements and retail investor protections – as well as a description of any stakeholder feedback and interagency review,” they wrote.
This article originally appeared in the June 22, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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