SEC Chair Gary Gensler on April 18, 2023, defended the year-old Staff Accounting Bulletin (SAB) No. 121 before a House panel, pushing back against Republican criticism that the guidance is blocking well-regulated banks from providing digital asset custody services and driving investors to offshore providers.
Gensler’s remarks were part of his first testimony before the House Financial Services Committee since Republicans took over the House following the November midterm elections. He spent much of the hearing deflecting a barrage of criticism from Republicans over various aspects of the commission’s crypto industry oversight and enforcement policies.
SAB No. 121, issued in March 2022, addresses SEC-registered 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.)
Under SAB No. 121, an entity responsible for safeguarding crypto assets for platform users should present a liability on its balance sheet at fair value to reflect that obligation, as well as a corresponding asset.
During the hearing, Representative Andy Barr, a Kentucky Republican, framed SAB No. 121 as a departure from banks’ historical practice of treating custody assets as off-balance sheet, echoing Fed Chairman Jerome Powell’s June 2022 comments before the Senate Banking Committee.
“SAB 121 changed that and I’m concerned about the consequences, because banks have capital, liquidity and other prudential requirements that non-bank custodians do not have, meaning banks cannot offer digital asset custody services at scale without significant balance sheet implications,” Barr said. “If banks cannot provide digital asset custody services at scale, they simply will not offer those services, which could lead to market participants not having bank-grade custody solutions to pick from, and will turn to offshore solutions like in the Bahamas, diminishing American competitiveness and compromising investor protection.”
Barr juxtaposed the effects of SAB No. 121 on banks with the late 2022 collapse of crypto exchange FTX, in which “not a single one of the 4,500 employees under your supervision at the SEC noticed that FTX was allowed to commingle customer funds, allowed …to trade, settle, custody, lend and borrow digital assets, without institutional-grade custody.”
Gensler responded that he’s “actually quite proud” of the staff that produced SAB No. 121, “because what they said is that public companies, not just banks, but public companies needed to put on their balance sheet if they had their customer crypto.”
“What we’ve subsequently found in bankruptcy court, Celsius bankruptcy and others, that in bankruptcy, investors just stand in line,” Gensler said.
Earlier this year, a judge in the bankruptcy proceedings for crypto lender Celsius Network concluded that assets in accounts through the Celsius’s Earn program were the property of the estate and not customers.
Answering another question from Barr on whether staff consulted with banking regulators before or after issuing the accounting bulletin, Gensler cited “significant dialogue” beforehand with the accounting profession, including Big four firms “because this questions kept coming up.” He said there was later consultation with bank regulators.
This article originally appeared in the April 19, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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