As such, House Financial Services Committee Chairman Rep. Patrick McHenry and Sen. Cynthia Lummis penned a letter to the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Administration to follow up on an inquiry they made regarding Staff Accounting Bulletin 121 (SAB 121). The bulleting altered the procedures financial institutions are expected to implement when handling digital asset accounting.
“Typically, custodial assets receive off-balance sheet accounting treatment. This is largely because customers retain ownership of their custodial assets and financial institutions are not permitted to conduct proprietary trading with customer assets,” according to the representatives. “As emphasized in comment letters, SAB 121 ‘deviates from existing accounting treatment of safeguarded assets held in a custodial capacity, which does not result in assets or liabilities reported on the custodian’s balance sheet.’”
SAB 121 was drafted by the Securities and Exchange Commission (SEC) in April 2022. According to the representatives, it may have been issued with the intention to clarify how digital assets should be treated by financial institutions and banks, but in actuality it risks creating “significant compliance costs for institutions that custody digital assets for customers.”
Language in the bulletin points to the risks associated with safeguarding the assets as an impetus for the directive’s content. Specifically, it states: “Accordingly, as long as Entity A is responsible for safeguarding the crypto-assets held for its platform users, including maintaining the cryptographic key information necessary to access the crypto-assets, the staff believes that Entity A should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users.”
"Safeguarding crypto assets presents unique risks and uncertainties. Explore key considerations on scope, recognition, measurement, disclosure, and adoption of SEC’s SAB 121: http://bit.ly/40Wx8fL #ICFR #Assets"
The letter enumerates some of the concerns surrounding that directive, specifically as it pertains to the circumstances leading up to digital asset lending company Celsius’ bankruptcy proceedings. Per a recent decision regarding the bankruptcy, the lender’s customers were deemed to be “unsecured creditors,” placing them “at the back of the line” with respect to asset recovery.
This, says the pair of Republican lawmakers, shirks decades of accounting precedent governing banks and other financial institutions. In fact, Federal Reserve Board Chair Powell pointed out this shift at a Senate Banking Committee hearing last year. “In sum, the effect of SAB 121 is to deny millions of Americans access to safe and secure custodial arrangements for digital assets,” reads the letter.
“Cryptocurrency is an asset that has not been frequently litigated in bankruptcy courts or regularly evaluated under property or contract law. When there is no legal or regulatory framework, parties rely upon written agreements,” adds the law firm. The full version of the lawmakers' letter can be read here.