How does SAB 121, which allows the House of Representatives and the President to veto each other, affect the encryption industry?

Author | jk, Odaily Star Daily

This week, the US House of Representatives held a vote to overturn the Cryptocurrency accounting policy SAB 121, which supports the US SEC. However, the vote fell far short of the two-thirds majority required to overturn the president’s decision.

Background Information: What exactly happened?

What is SAB 121?

Staff Accounting Bulletin 121 (SAB 121) is a guidance issued by the Securities and Exchange Commission (SEC) of the United States, requiring companies holding Crypto Assets to record these assets on their balance sheets and disclose related risks. This bulletin applies to all entities regulated by the SEC, especially banks and Financial Institutions, which may lead to higher capital requirements and thus affect their ability to provide Cryptocurrency custody services.

The SEC states that SAB 121 is ‘non-binding staff guidance’ aimed at enhancing disclosures to investors.

So what happened after the SEC proposed?

In May, Republican Congressman Mike Flood from Nebraska and Democratic Congressman Wiley Nickel from North Carolina introduced a resolution to overturn the announcement in February. The resolution to overturn SEC’s SAB 121 passed the House by a vote of 228-182. A week later, the Senate passed the resolution with a vote of 60-38, but this decision was subsequently vetoed by Biden. The White House under his leadership stated that lawmakers could possibly ‘inappropriately limit the SEC’s ability to ensure appropriate safeguards’ by invoking the Congressional Review Act.

To overturn President Biden’s veto, a two-thirds majority is required in both houses of Congress, with 67 votes needed in the Senate out of 100 senators, and 290 votes needed in the House of Representatives. Thursday’s vote in the House of Representatives did not meet this two-thirds majority threshold. 21 Democrats and 207 Republicans voted in favor, while 183 Democrats and 1 Republican voted against.

In summary, the plot line is that SEC proposed SAB 121 → House of Representatives voted against → Senate voted against → Biden vetoed the veto of both houses of Congress, supporting SAB 121 → Both houses of Congress are currently voting, attempting to override Biden’s veto and prohibit SAB121, but currently failing in the House of Representatives voting stage.

Currently, against the backdrop of this year’s US presidential election, SAB 121 has actually become a touchstone and battleground for the attitudes of presidential candidates and lawmakers from both parties towards the encryption industry.

What is the legislative process in the United States like?

1. Bill Proposal: First, the bill is proposed by a member of the House of Representatives or the Senate.
2. Committee review: The bill is submitted to the relevant committee for review, discussion, and modification.
3. House Vote: After being passed by the committee, the bill goes to a full vote in the House of Representatives. If it receives a simple majority (more than half) support, the bill is passed.
4. Senate vote: The bill is then sent to the Senate. If the Senate also passes it by a simple majority, the bill is sent to the President for signature.
5. Signing or Veto by the President: The President may choose to sign a bill into law or veto it. If the President vetoes a bill, it does not immediately become law.
6. If the President vetoes: If the President vetoes the bill, it will be returned to the chamber (usually the House of Representatives) that proposed the bill, along with the reasons for the veto.
7. House of Representatives Re-vote: The House of Representatives may re-vote on a veto by the President. If the veto is to be overturned, it requires two-thirds majority (290 votes, if all 435 representatives vote).
8. Senate Re-vote: If the House of Representatives successfully overturns the President’s veto, the bill is then sent to the Senate. If the Senate also passes it with a two-thirds majority vote (67 votes if all 100 senators vote), the bill will overturn the President’s veto and become law.

At present, the decision to overturn SAB121 is stuck at step 7.

How did various parties react after the vote failed?

SEC

According to The Block, an SEC spokesperson stated in April: ‘We have repeatedly seen encryption companies fail and their customers lining up in bankruptcy courts hoping to get what they believe is rightfully theirs. We have also seen the risks to investors of the companies that hold these assets when these assets are hidden off their balance sheets. These disclosures provide important insights into the level of risk undertaken by encryption custodians.’

The party attempting to overturn SAB 121

Mike Flood, a Republican member of the Nebraska House of Representatives who proposed the resolution, said he would continue to pursue other avenues to end SAB 121 after the vote failed, so that the government would no longer hinder the future development of digital finance. Before the House of Representatives, Flood called SAB 121 “not a political issue, but a bad regulation” that restricts banks from participating in digital asset custody, and added that the SEC exceeded its authority in defining bank custody policy.

House Financial Services Committee Chairman, North Carolina Republican Patrick McHenry, condemned Biden’s veto, saying the government would “rather play politics, stand with the power-hungry bureaucrats, than stand with the American people,” and not allow the success of the resolution.

The American Bankers Association reiterates that SAB 121 requires banks to include customer cryptocurrency in their balance sheets, which “effectively prevents banks from offering digital asset custody services on a large scale” and limits banks’ ability to adopt BTC ETFs and tokenization.

According to Coindesk, “The president ignores bipartisan support from Congress to avoid his rebellious SEC chairman from embarrassment,” said Cody Carbone, chief policy officer of the Digital Chamber of Commerce, representing the Cryptocurrency industry in Washington.

Latest development: SEC may reach Consensus with the banking industry

California Representative Maxine Waters said the debate over the policy has become almost irrelevant this week as the SEC is negotiating “targeted changes” with banking industry representatives and “may be close to reaching a protocol.” However, she pointed out that “Republicans are still pushing this aggressive and overly broad approach,” which she believes would weaken the role of regulatory agencies.

Odaily reported today that the specific modification is The US SEC allows certain companies to be exempt from the Cryptocurrency accounting policy SAB 121.

A source familiar with the SEC said that the SEC staff has begun issuing guidance, under which certain arrangements may not need to report liabilities on the balance sheet, in accordance with guidance issued two years ago.

Several major banks that have been negotiating with SEC staff since 2023 have obtained permission to bypass the balance sheet reporting, ensuring the protection of their clients’ assets in the event of bankruptcy or closure. The source said that other measures, such as internal safeguards aimed at better protecting these assets, will address legal risks associated with emerging asset classes. The SEC believes that the guidance has been effective, as companies have made adjustments to address threats posed by Hacker attacks and business failures to investors.

SEC’s accounting position may expand the range of US Cryptocurrency holders’ options for companies to accommodate their constantly rising investment portfolios. Banks said that accounting treatment actually prevented them from providing encryption services because larger balance sheets would trigger capital requirements set by banking regulators, not the SEC.

Sources say that the bank successfully argued in closed-door discussions with SEC officials that the Wallet and SpotBTC ETFs should not fall under the scope of SAB 121.

Aaron Jacob, head of TaxBit accounting solutions providing encryption accounting products for exchanges and investors, said that Financial Institutions are increasingly eager to participate in the encryption industry, especially now that the SEC has approved Spot BTC products.