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On March 2, Senator Cynthia M. Lummis (R-WY) and Representative Patrick McHenry (R-NC) sent a letter to the Federal Reserve Board, FDIC, OCC, and NCUA requesting input on SEC guidance issued last year that directs cryptocurrency firms to account for customers’ digital assets on their balance sheets. Last April, the SEC issued Staff Accounting Bulletin No. 121 (SAB 121), covering obligations for safeguarding crypto-assets held by entities for platform users. Among other things, SAB 121 clarified that entities should track customer assets as a liability on their balance sheets. “[A]s 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,” SAB 121 explained.
Claiming that SAB 121 “purports to require banks, credit unions and other financial institutions to effectively place digital assets on their balance sheets,” the lawmakers argued that this “would trigger a massive capital charge,” and in turn would likely prevent regulated entities from engaging in digital asset custody. Rather, regulators should encourage regulated financial institutions to offer digital asset services, since they are subject to the highest level of oversight, the letter said. Among other things, the letter asked the regulators whether the SEC contacted them prior to issuing the guidance, and if they have directed regulated financial institutions to comply with SAB 121. The lawmakers also inquired whether the regulators “agree that SAB 121 potentially weakens consumer protection by preventing well-regulated banks, credit unions, and other financial institutions from providing custodial services for digital assets[.]” The letter pointed to the bankruptcy case of a now-defunct crypto lender, which classified all customers as unsecured creditors, as an example of the legal risk of requiring customer custodial assets be placed on an entity’s balance sheet. “SAB 121 places customer assets at greater risk of loss if a custodian becomes insolvent or enters receivership, violating the SEC’s fundamental mission to protect customers,” the lawmakers wrote.