US Congress Challenges SEC’s New Custody Rules for Crypto in Financial Institutions

In a significant move, members of the US Congress have voiced their opposition to the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) 121. In a memo dated November 15, legislators addressed the Chairman of the FDIC Board, Acting Comptroller of the Currency Michael Hsu, and other key financial authorities, expressing their concerns.

The crux of the matter lies in the SEC’s SAB 121, introduced on April 11, 2022, which only came under public scrutiny after a Government Accountability Office (GAO) report revealed that the directive constituted a rule under the Congressional Review Act. SAB 121 requires financial institutions, including credit unions and banks offering crypto custodial services, to maintain a specific reserve to back their customers’ digital assets.

Challenging the SEC’s directive, US Congress members assert that SAB 121 should not legally impact these financial institutions, freeing them from the obligation to recognize liabilities and corresponding asset offsets on their balance sheets.

Their opposition to SAB 121 is grounded in procedural concerns, noting that the SEC neither submitted the rule to Congress nor the GAO, nor published it in the Congressional Record, as required by the Administrative Procedure Act (APA) and the Congressional Review Act (CRA). The legislators warn that allowing SAB 121 to stand could set a dangerous precedent, enabling regulatory agencies to bypass the APA and unlawfully expand their regulatory reach.

The memo culminates with a call for the FDIC Chairperson and other financial authorities to clarify and confirm that the SAB 121 ruling should not be enforced.

Leading the charge against SAB 121 is pro-crypto Senator Cynthia Lummis, who initially raised concerns in August 2022. She is joined by Senator Kirsten Gillibrand and Representatives Patrick McHenry and French Hill, all of whom have questioned the SEC’s rule’s legality.

The SEC, under the leadership of Gary Gensler, has aggressively pursued crypto regulation in the past two and a half years, leading platforms like Coinbase to seek expansion in international markets, including the UK and EU, with Ireland chosen as their European hub.