Senate Stablecoin Bill Would Override SEC Crypto Accounting Bulletin

A bipartisan stablecoin framework rolled out on April 17, 2024, by Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) would override the SEC’s two-year-old staff accounting guidance on custodied crypto assets.

The provision, part of the Lummis-Gillibrand Payment Stablecoin Act, represents the latest attempt by lawmakers to reverse Staff Accounting Bulletin (SAB) No. 121 amid criticism over the guidance’s effect on banks’ ability to offer custody services for crypto assets.

Under the accounting guidance, issued in March 2022, SEC-registered entities and certain other companies responsible for safeguarding crypto assets for platform users must present a liability on their balance sheet at fair value to reflect that obligation, as well as a corresponding asset. The guidance has drawn scorn from the banking and crypto industries, as well as both Republican and Democratic lawmakers, for departing from the traditional off-balance-sheet treatment of custodied assets.

Language near the end of the Lummis-Gillibrand bill spells out that: “Crypto assets properly held in a custodial account shall not be considered assets or liabilities of the custodian for any purpose and shall be maintained on an off-balance sheet basis, including for the purpose of accounting treatment for the custodian, notwithstanding the form in which the assets are maintained, and for the purposes of the capital calculations of depository institutions and all other financial institutions.”

Lummis is among Congress’ most vocal SAB No. 121 detractors. Last month, she cheered the House Financial Services Committee’s vote to advance a Congressional Review Act (CRA) resolution to invalidate the guidance, which followed a Government Accountability Office (GAO) report deeming the bulletin a rule for the purposes of the CRA. In a statement at the time, she warned the guidance “has the potential to shake the foundation of essential custody services and increase bankruptcy risks for consumers.”

“Before the SEC issued a legally binding directive with widespread implications, it should have solicited feedback from federal banking regulators and the public,” Lummis said in the March statement.

Lummis is the sponsor of the parallel Senate CRA resolution.

More broadly, the sweeping Lummis-Gillibrand bill addresses regulatory uncertainty around stablecoins, cryptocurrencies whose values are generally pegged to the US dollar. The legislation would allow federal and state depository institutions to issue any amount of stablecoins, and state non-depository trust companies to issue stablecoins up to $10 billion. Among other provisions, it also bans so-called algorithmic stablecoins; sets out segregation, disclosure, and other prudential requirements; and creates a Federal Deposit Insurance Corp. (FDIC) receivership regime for issuers. Issuers would need to maintain 1:1 reserves.