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US Legislators Push for Banks' Entry into Crypto Custody

US House Financial Services Committee cast a vote to allow crypto custody for U.S. banks

On February 29, the committee cast a decisive vote, advancing a resolution poised to challenge the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin No. 121 (SAB 121). This controversial guideline, introduced in March 2022, has been a substantial barrier for banks aspiring to offer crypto custody services. By potentially overturning SAB 121, the resolution aims to dismantle these obstacles, fostering a regulated environment where banks can safely act as custodians for digital assets.

This bipartisan effort saw 31 members of the House Financial Services Committee (HSFC) casting their votes in favor, juxtaposed against 20 dissenting voices. The committee's statement highlighted the resolution's goal: to enhance consumer protection by eliminating the hindrances preventing regulated banks from serving as digital asset custodians. Republican Congressman Mike Flood, alongside Democrat Representative Wiley Nickel, spearheaded the resolution, introduced on February 1. 

They argue that SAB 121's requirement for banks to list crypto holdings as liabilities undermines the traditional off-balance sheet treatment of custodial assets, including digital assets like Bitcoin.

Bipartisan support and opposition

In the recent markup hearing, voices from both sides of the political aisle converged, with 31 members of the House Financial Services Committee (HSFC) advocating for the resolution against SAB 121, and 20 opposing. 

Republican Congressman Mike Flood, who introduced the resolution, criticized SAB 121 for its departure from traditional financial norms, where custodial assets are not recorded as liabilities. He highlighted the detrimental impact of such requirements on banks' regulatory obligations, including capital and liquidity mandates. Echoing Flood's concerns, Democrat Representative Wiley Nickel emphasized the resolution's potential to correct what they perceive as an overreach by the SEC, thereby safeguarding consumers and the integrity of digital asset custody.

Patrick McHenry (@PatrickMcHenry):

“There is bipartisan agreement SAB 121 undermines consumer protection and leaves customers' digital assets vulnerable.

I look forward to getting this measure across the finish line to overturn it.

Thanks to @USRepMikeFlood, @RepWileyNickel, and @SenLummis for your leadership.” https://t.co/otlpBnnMWW

Conversely, the resolution faces opposition from figures like Democrat Congresswoman Maxine Waters, who argued that rescinding SAB 121 represents an ironic stance from crypto-friendly politicians. She pointed out the crypto industry's frequent calls for clarity from the SEC, yet the resolution could hinder the SEC's ability to provide such guidance. Waters' comments reflect a complex debate surrounding the regulation of digital assets, balancing the need for innovation with consumer protection and market stability.

Implications for banks and digital assets

Congressman Flood’s assertion that the SEC’s guidelines unfairly penalize banks by deviating from traditional custodial practices underscores a broader concern: the current regulatory environment may inadvertently stifle innovation and limit consumer access to digital asset markets.

Critics, including crypto-friendly Republican Congressman Tom Emmer, lambaste SAB 121 as an exemplar of regulatory overreach, arguing it introduces unnecessary risks into the crypto ecosystem. 

Tom Emmer (@GOPMajorityWhip):

“.@GaryGensler is violating the SEC’s statutory mission with SAB 121.

We must pass @USRepMikeFlood's resolution so Chair Gensler’s illegal rule ceases to be in effect.

See my remarks on the resolution below.” pic.twitter.com/cn8HQV2cAb

Emmer's condemnation of the SEC’s approach as “illegal” and prejudiced against digital assets highlights the tension between regulatory bodies and the crypto industry, a dynamic further complicated by Democrat Congresswoman Maxine Waters’ critique of the resolution as counterproductive to achieving regulatory clarity.

As the resolution moves towards a full floor vote in both the House and the Senate, the stakes are high.