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US House Committee seeks to reverse SEC regulation restricting bank crypto custody

The House Financial Services Committee (HSFC) recently took a significant step towards potentially reshaping the landscape for cryptocurrency custody services by casting votes on a resolution aimed at nullifying a guideline from the United States Securities and Exchange Commission (SEC). This guideline has been a significant barrier for banks interested in offering crypto custodial services.

During a recent markup hearing held on Feb. 29, the resolution garnered support from both sides of the political spectrum, with 31 members voting in favor and 20 against. The resolution in question addresses the SEC’s Staff Accounting Bulletin No. 121 (SAB 121), which has been a point of contention since its introduction in March 2022. This guideline mandates that institutions holding cryptocurrency assets must categorize these holdings as liabilities on their balance sheets.

The move to repeal SAB 121 is seen as a potential game-changer for regulated banks looking to step into the crypto custody space. By eliminating the obstacles posed by SAB 121, banks could better serve as custodians for digital assets, thus enhancing consumer protection in the process.

Republican Congressman Mike Flood, who co-introduced the resolution alongside Democrat Representative Wiley Nickel on Feb. 1, has been vocal in his criticism of SAB 121. Flood argues that the mandate unfairly treats banks interested in crypto custody, as it adds complexity to their regulatory obligations, particularly concerning capital and liquidity requirements.

The resolution’s supporters contend that SAB 121 goes beyond the traditional role of an accounting bulletin and effectively functions as a law. To fully nullify SAB 121, the resolution must pass through a full floor vote in both the House and the Senate.

Tom Emmer, a prominent proponent of crypto-friendly legislation in Congress, has openly criticized SAB 121 as a reflection of SEC Chair Gary Gensler’s bias against the digital asset ecosystem. Emmer highlights the risks posed by the regulation, particularly in terms of hindering banks’ ability to offer custodial services for approved Bitcoin ETFs.

On the other side of the aisle, Democrat Congresswoman Maxine Waters has voiced opposition to the resolution to revoke SAB 121. Waters believes that the move is ironic given the consistent calls from Republicans and the crypto industry for clearer regulatory guidance from the SEC. She argues that repealing SAB 121 could impede the SEC staff from providing the much-needed clarity on cryptocurrency regulations.

Staff Accounting Bulletins, such as SAB 121, are not legally binding but rather serve as non-enforceable guidelines to assist companies in accounting for customer crypto holdings. Unlike formal rules, these guidelines do not undergo public notice or comment periods.

In an adjacent development, SEC Commissioner Hester Pierce, affectionately referred to as ‘Crypto Mom,’ has advocated for increased decentralization in the U.S. financial system and a more lenient approach to crypto regulation and enforcement.

Speaking at the ETHDenver conference on Feb. 29, Pierce emphasized the benefits of decentralization in strengthening the financial system by reducing concentration risks.

It remains to be seen how the resolution to nullify SAB 121 will progress through Congress, but its potential impact on the cryptocurrency custody sector is already garnering significant attention from industry players and regulators alike.

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