Senator Cynthia Lummis and Representative Patrick McHenry have warned of increasing risks to customer funds resulting from the collapse of a crypto custodian as SAB 121 is implemented by the SEC.
“In sum, the effect of SAB 121 is to deny millions of Americans access to safe and secure custodial arrangements for digital assets.”
⬇️⬇️ My letter with @PatrickMcHenry here:https://t.co/kEQKJMg4tC
— Senator Cynthia Lummis (@SenLummis) March 2, 2023
The letter was addressed to the FDIC, the Fed, OCC and the National Credit Union Administration.
SAB 121 was issued in April 2022. Under the directive, firms recognise the liability and record the corresponding entry on the balance sheet at the fair value of the custodian’s client digital assets.
Lawmakers pointed to the Celsius bankruptcy. In that case, the court classified all platform clients as unsecured creditors, thereby placing them “at the back of the line to recover their assets”.
“SAB 121 reverses decades of precedent regarding the accounting for custodial assets held by banks, credit unions and other regulated financial institutions,” the letter said.
The lawmakers warned that the requirement to put digital assets on balance sheets would lead to a “massive outflow of capital”.
Lummis and McHenry also stated that SAB 121 does not contain a clear definition of digital assets.
“The scope of assets covered by this broad definition of the company’s balance sheet, whether it be virtual currency, stablecoins or even tokenised shares, is unclear. […] A more detailed hierarchy for this asset class is needed, one that takes into account the opportunities and risks of digital assets,” the letter said.
The lawmakers urged agencies to clarify whether they plan to require supervised entities to follow SAB 121 or whether they see it as a potential weakening of consumer protections.
On March 3, the head of the SEC, Gary Gensler, warned crypto exchanges about non-compliance with custodians’ status.
Earlier, the agency’s chair said that crypto companies should “take note” of Kraken’s decision to shut down its staking program for US customers.
Earlier in February, Gensler said that cryptocurrency regulation would be a priority for 2023.