President Biden Vetoes Legislation Rescinding SEC Staff Accounting Bulletin 121 (SAB 121) on Crypto Custody | Practical Law

President Biden Vetoes Legislation Rescinding SEC Staff Accounting Bulletin 121 (SAB 121) on Crypto Custody | Practical Law

President Biden vetoed a resolution passed by both houses of the US Congress to repeal SEC Staff Accounting Bulletin No. 121 (SAB 121), which sets out the views of the SEC staff on accounting and disclosure duties related to the safeguarding of crypto assets held by a party for its platform users.

President Biden Vetoes Legislation Rescinding SEC Staff Accounting Bulletin 121 (SAB 121) on Crypto Custody

by Practical Law Finance
Published on 11 Jun 2024USA (National/Federal)
President Biden vetoed a resolution passed by both houses of the US Congress to repeal SEC Staff Accounting Bulletin No. 121 (SAB 121), which sets out the views of the SEC staff on accounting and disclosure duties related to the safeguarding of crypto assets held by a party for its platform users.
On May 31, 2024, President Biden vetoed House Joint Resolution 109 (H.J. Res. 109), passed by both houses of the US Congress, which would have rescinded Securities and Exchange Commission (SEC) Staff Accounting Bulletin Number 121 (SAB 121) (87 Fed. Reg. 21015 (April 11, 2022)) and a related October 31, 2023 letter of opinion from the Government Accountability Office (GAO letter). SAB 121 addresses accounting and disclosure duties related to the safeguarding of crypto assets held by a party for its platform users (see Legal Update, SEC Staff Issues Release on Accounting and Disclosure for Parties Safeguarding Crypto Assets).
SAB 121 recommended that an obligation to safeguard crypto assets held for platform users should be presented as a liability on the balance sheet of the entity that is responsible for safeguarding the assets and noted:
  • Safeguarding includes maintaining the cryptographic key information necessary to access the assets.
  • The safeguarding liability should be measured at initial recognition and at each reporting date as the fair value of the crypto assets that the party is responsible for holding for platform users.
On May 8, 2024, the US House of Representatives (House) voted 228 to 182 on a resolution sponsored by US Representative Mike Flood (R-NE) to repeal the guidelines set out in SAB 121, and on May 16, 2024, the US Senate voted 60 to 38 also to repeal the guidelines. On May 30, 2024, nine US lawmakers, led by Senator Lummis, directed a letter to Present Biden urging him not to veto the resolution, reasoning that:
  • The resolution reflects overwhelming bipartisan support.
  • SAB 121 suggests an accounting treatment that is contrary to that of all other assets and puts consumers at risk by precluding the most regulated financial institutions from safeguarding digital assets.
  • The SEC inappropriately issued the guidance instead of engaging in notice and comment rulemaking standard procedures.
In his message to the House regarding his veto, President Biden noted that he considered the following:
  • SAB 121 reflects considered technical SEC staff views regarding the accounting obligations of certain firms that safeguard crypto assets.
  • Reversal of the judgment of SEC staff risks undercutting the SEC’s broader authorities regarding accounting practices.
President Biden also noted he will not support measures that jeopardize the well-being of consumers and investors as appropriate guardrails that protect consumers and investors are necessary to harness the potential benefits and opportunities of crypto-asset innovation. The Office of Management and Budget (OMB) presaged the veto in its May 8, 2024, Statement of Administration Policy, in which it noted the Biden administration strongly opposed passage of H.J. Res. 109.
SAB 121 was originally issued as industry guidance but was later deemed as a rule subject to the Congressional Review Act in the GAO letter. The GAO letter was issued in response to a request from US Senator Cynthia M. Lummis (R- WY) for a decision on whether SAB 121 is subject to the Congressional Review Act (CRA). The CRA:
Requires that before a rule can take effect, an agency must submit a report on the rule to both the House of Representatives and the Senate as well as the Comptroller General, and provides procedures for congressional review where Congress may disapprove of a rule. The GAO concluded that SAB 121 is a rule for purposes of CRA because it met the Administrative Procedure Act (APA) definition of a rule, and no exceptions applied.
Update: On July 11, 2024, The House failed to secure the necessary two-thirds vote to override President Biden's veto on the repeal of SAB 121.