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  • House passes resolution to nullify SEC’s rule on crypto accounting guidance

    Securities

    On May 8, the U.S. House of Representatives passed H. J. Res. 109, the first step in an attempt to nullify the SEC’s Staff Accounting Bulletin No. 121 (SAB 121) under the Congressional Review Act. SAB 121 describes how the SEC expects entities to account for and disclose their custodial obligations to “safeguard crypto-assets held for their platform users,” and has been in effect since April 11, 2022. As previously covered by InfoBytes, in October 2023, the GAO found SAB 121 was a rule, not guidance, making SAB 121 subject to the Congressional Review Act.

    Securities Accounting SEC Congress Agency Rule-Making & Guidance Congressional Review Act

  • CBO report outlines strengths and risks of the FHLBank system

    Federal Issues

    Recently, the Congressional Budget Office (CBO) released a report on the Federal Home Loan Banks’ (FHLBanks) role in the financial system, outlining their strengths and risks in the larger financial system. The CBO noted that FHLBanks are insulated from failure because their main activity, granting advances to members, was “overcollateralized and benefits from the banks’ super-lien position.” On accounting this year, the CBO estimated that in FY 2024, FHLBanks will receive $7.3 billion in subsidies, driven by new debts and reductions in debt-service costs. The CBO also estimated that in FY 2024, FHLBanks will issue $800 billion of debt and make advances of $560 billion. The CBO listed three potential risks FHLBanks could pose to the broader financial system: first was a risk to taxpayers in the event the FHLBank system failed and required government support; second was the risk that any FHLBank stress could spill over into other financial areas; and third was the risk of losses to the FDIC Deposit Insurance Fund from FHLBanks’ collateralized lending and their “super-lien positions.” However, the CBO’s report noted that FHLBanks pose less of a risk than Fannie Mae, Freddie Mac, or other commercial banks. Further, there have never been any credit losses on an FHLBank advance. Despite these strengths, CBO noted that FHLBanks could still fail in an economic crisis.

    Federal Issues FHLB Accounting

  • Republican lawmakers ask about risks of customers’ digital assets on balance sheets

    Securities

    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.

    Securities SEC Digital Assets Cryptocurrency Congress Federal Reserve FDIC OCC NCUA Accounting Fintech

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