SEC allows certain firms to skirt controversial crypto accounting bulletin

Some companies and financial institutions have proposed business practices that the U.S. Securities and Exchange Commission staff have agreed would allow them to fall outside of controversial crypto accounting guidance, according to a source at the SEC.

Ever since the release of Staff Accounting Bulletin No. 121, also known as SAB 121, in March 2022, and in the wake of numerous crypto industry bankruptcies, firms have been seeking advice from the SEC on how to develop new policies and procedures related to cryptocurrency, according to the SEC source who spoke to The Block. The source added that SAB 121 in itself has not changed. 

Bloomberg Tax first reported the news.

Starting in 2022, several firms in the crypto industry began to deteriorate and filed for bankruptcy. Those include Terraform Labs after the crash of its algorithmic stablecoin followed by Celsius, Genesis and FTX. Cases have been handled differently as questions arose over how customers are treated . 

"In April 2022, there were a bunch of unanswered questions about how the law on these things would shake out, and we saw a lot of crypto industry participants that were not careful about providing these services harm a lot of customers," the SEC source said. 

Firms have now demonstrated that the way they have set up certain procedures and technology allows customers to get their crypto back as they would with any other asset, such as dollars, when there is a bankruptcy and thus don't have the obligations under SAB 121, the source added. 

Staff Accounting Bulletin No. 121, also dubbed SAB 121, has drawn controversy over the past year over concerns in the crypto industry that it could prevent banks from safeguarding digital assets. It requires firms that custody crypto to record customer crypto holdings as liabilities on their balance sheets.

Firms made multiple changes to protect assets and demonstrated that they have control over them, similar to how traditional assets are treated, the SEC source said. That includes policies and procedures about accounting, protection of the assets and who has access to them, they added.

The SEC source declined to answer whether crypto players had given assurances that they would be removed from the scope of SAB 121.

"Anyone who demonstrates the ability to answer the questions raised by the SAB and has the technology and practices and procedures in place and all the things that other market participants who have come in and received this no objection guidance from our accounting staff — that is available to any entity that would want to be providing crypto asset safeguarding services," they said. 

SAB 121 in Congress

Reps. Mike Flood, R-Neb., and Wiley Nickel, D-N.C. introduced a resolution to overturn the bulletin in February. Later, the full House voted 228-182 in favor of the measure to overturn the bulletin in May, with mostly Republicans signing on as well as 21 Democrats. A week later, the Senate voted 60 to 38, with several Democrats, including Senate Majority Senate Majority Leader Chuck Schumer, D-N.Y., voting in favor of the measure.

President Joe Biden then  vetoed the resolution.

Earlier Thursday, the U.S. House voted again to override President Biden's veto, but it failed . Ahead of the vote on Wednesday, House Financial Services Committee Ranking Democrat Maxine Waters of California noted that "special interest group representing large custody banks" and the SEC are ironing out details to avoid a "sledgehammer effect."

"I understand that the SEC may be close to reaching an agreement on these modifications, which would ensure that well-regulated entities like custody banks can offer crypto custody services consistent with SAB 121," Waters said. 

Waters described the consultation process that the SEC has had with the industry since SAB 121 was issued, the SEC source said.