Congressional Record, Volume 170 Issue 80 (Wednesday, May 8, 2024)

[Congressional Record Volume 170, Number 80 (Wednesday, May 8, 2024)]
[House]
[Pages H2950-H2963]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

{time} 1215
PROVIDING FOR CONGRESSIONAL DISAPPROVAL OF THE RULE SUBMITTED BY THE
SECURITIES AND EXCHANGE COMMISSION RELATING TO ``STAFF ACCOUNTING
BULLETIN NO. 121``

Mr. McHENRY. Mr. Speaker, pursuant to House Resolution 1194, I call
up the joint resolution (H.J. Res. 109) providing for congressional
disapproval under chapter 8 of title 5, United States Code, of the rule
submitted by the Securities and Exchange Commission relating to ``Staff
Accounting Bulletin No. 121``, and ask for its immediate consideration
in the House.
The Clerk read the title of the joint resolution.
The SPEAKER pro tempore. Pursuant to House Resolution 1194, the joint
resolution is considered read.
The text of the joint resolution is as follows:

H.J. Res. 109

Resolved by the Senate and House of Representatives of the
United States of America in Congress assembled, That Congress
disapproves the rule submitted by the Securities and Exchange
Commission relating to ``Staff Accounting Bulletin No. 121''
(87 Fed. Reg. 21015 (April 11, 2022) and a letter of opinion
from the Government Accountability Office dated October 31,
2023 (which was printed in the Congressional Record on
November 1, 2023, on pages S5310-5312), concluding that such
Staff Accounting Bulletin is a rule under chapter 8 of title
5, United States Code), and such rule shall have no force or
effect.

The SPEAKER pro tempore. The joint resolution shall be debatable for
1 hour equally divided and controlled by the chair and ranking minority
member of the Committee on Financial Services or their respective
designees.
The gentleman from North Carolina (Mr. McHenry) and the gentlewoman
from California (Ms. Waters) will each control 30 minutes.
The chair recognizes the gentleman from North Carolina (Mr. McHenry).

General Leave

Mr. McHENRY. Mr. Speaker, I ask unanimous consent that all Members
may have 5 legislative days in which to revise and extend their remarks
and submit extraneous material on the joint resolution under
consideration.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from North Carolina?
There was no objection.
Mr. McHENRY. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise in support of this bipartisan resolution of
disapproval. This resolution is an essential effort to protect
consumers and foster innovation in digital asset markets.
It is also critical to stop the Securities and Exchange Commission's
regulatory power grabs and efforts to circumvent the Administrative
Procedure Act.
I thank my friend Congressman Flood of Nebraska, a leader on
financial innovation and digital asset policy, for introducing this
bipartisan resolution.
Staff Accounting Bulletin 121, or SAB 121, is one of the most glaring
examples of the current Securities and Exchange Commission's reign of
overreach.
Through SAB 121, the Commission is trying to dictate how financial
institutions and firms safeguard Americans' digital assets, in
particular here, digital assets, under the guise of so-called staff
guidance.
Let me explain why this is deeply concerning. Because they call it a
staff guidance, the Securities and Exchange Commission could avoid
public comment and the rulemaking process governed by the
Administrative Procedure Act, or APA.
This is where the public gets to give an opinion back or expertise
back to the agency so they can improve the rulemaking by listening to
the public. This is a longstanding process here in the United States.
Not only did the Securities and Exchange Commission bypass Congress
and the Comptroller General, but the Commission did not even consult
with other financial regulators, prudential regulators responsible for
overseeing banks prior to issuing SAB 121.
Thanks to the work of the House Financial Services Committee and my
friend Senator Lummis, the GAO rightly deemed SAB 121 a rule for
purposes of the Congressional Review Act, providing Congress with the
opportunity to right the wrong of the agency action.
SAB 121 requires financial institutions and firms that are
safeguarding their customers' digital assets to hold those assets on
their balance sheet.
That means banks would be required to take on significant capital
liquidity and other costs under the existing prudential regulatory
framework.
This essentially makes it cost prohibitive for financial institutions
to custody their customers' digital assets.
This is a massive deviation for how highly regulated banks are
traditionally required to treat assets they hold on behalf of their
customers.
Now, this is the point that everyone can understand. This is a change
that harms consumers and makes them less protected. It is not a change
for the better, clearly.
It limits the options for consumers and increases concentration risk
to the financial system. Perhaps even worse, it could leave Americans'
assets vulnerable in the event of a bank failure, just as we saw with
Silicon Valley Bank last year.
If you want Americans' assets to be protected, they should be held in
custody, not on a bank balance sheet. If you want Americans to be able
to engage with digital assets safely and securely, banks, which are
some of the most highly regulated entities in our country and in the
world, are probably the best places for them to be kept. Unfortunately,
SAB 121 makes this nearly impossible.
We hear a lot from our Democrat colleagues about consumer protection.
If that concern is genuine, and I think it is, they should support
Congressman Flood's bipartisan resolution before us today.
Let me give you one example of why this guidance is problematic. The
Securities and Exchange Commission recently approved 11 Bitcoin ETFs,
which allow everyday investors to gain exposure to this new technology.
It is a decade old, but it is relatively new.
Of those 11, zero--and I repeat, zero--use banks as their primary
custodian. Instead, all that risk is now concentrated in a few
entities.
Let's do a quick recap. The Securities and Exchange Commission
through Staff Accounting Bulletin 121 upended traditional custody
practices.
Just like you hold a stock with a stockbroker, it is held in custody.
That means if that entity goes bankrupt, your asset is still protected.
It is held in custody and safeguarded as if it is in a safe.
We want digital assets to be treated the same way that we treat other
assets and be protected. This staff accounting bulletin upends
traditional custody practices for banking institutions and makes a joke
of the rulemaking process and ignores other regulatory agencies and
market participants that are impacted by this bulletin. That is a bad
process with even worse policy outcomes.
If you want consumers to be protected in digital assets markets, vote
``yes'' on this resolution. If you want to return bank custody
practices to the tried, tested, and successful approach that we have
had in this country for centuries, then vote ``yes.'' If you support
financial innovation, you should vote ``yes,'' as well.
Finally, if you want to send a message that rogue regulators cannot
circumvent Congress and our well-established rulemaking process, vote
``yes.''
Let's bring a level of common sense into the world of the digital
asset debate or crypto and bring consumer protection back to this
marketplace where it needs to be.

I encourage my colleagues to vote ``yes'' on this Congressional
Review Act.
Finally, I thank Congressman Flood on the Republican side and
Congressman Nickel on the Democrat side for their leadership on this
important topic.
Mr. Speaker, I reserve the balance of my time.
Ms. WATERS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise in strong opposition to H.J. Res. 109, a
Congressional Review Act resolution that would overturn accounting
guidance for crypto

[[Page H2951]]

assets from the Securities and Exchange Commission known as Staff
Accounting Bulletin 121, or SAB 121.
The bill's sponsors have falsely asserted that this bill is meant to
address a narrow concern from a particular special interest group, but,
in reality, it is drafted in a way that is far broader than this narrow
concern.
The collateral damage caused by this CRA resolution would be far-
reaching, causing significant harm to investors, consumers, public
companies, and the safety and soundness of our capital markets.
The bill takes a sledgehammer to fix an issue that may merely need a
scalpel, and it does so because my colleagues on the other side of the
aisle are not only interested in doing the bidding of special interest
groups, they are also interested in attacking and undermining the SEC
in every possible way, as they have done relentlessly since the
beginning of this Congress.
SAB 121 is highly technical guidance, therefore, let me break it down
simply. SAB 121 has been in place for 2 years, and it only applies to
companies that hold crypto assets on behalf of their customers.
This is known as providing custody services. SAB 121 provides
guidance for these companies in two respects.
First, it advises companies on how they should disclose crypto assets
that they have in custody, and second, it advises companies on how they
should record those crypto assets on their balance sheets.
The first prong of the guidance I described on disclosure of crypto
assets is critical to providing transparency for investors and the
public on volatile crypto assets.
This kind of transparency helps prevent the kind of fraud and
mishandling of crypto assets that led to the collapse of major crypto
companies like FTX. In fact, this disclosure guidance has been broadly
supported by industry and advocate stakeholders alike.
The second prong of SAB 121 advises relevant companies on how to
record crypto assets on their balance sheets.
Under the guidance, the amount of the liability should correspond to
the fair value of the crypto assets they are obligated to safeguard.
This ensures that the company providing custody services has
sufficient resources to secure these assets for the users against any
theft, loss, or other misuse that could result in financial
consequences.
The SEC has explained that this guidance is prudent due to the unique
risks and uncertainties associated with crypto assets.
The sponsor of this resolution has tried to reason that this bill is
meant to respond to a narrow concern from largely custody banks, but it
really has much more far-reaching, negative consequences.
Specifically, this special interest group has raised concerns that
the second prong of SAB 121 that I described on accounting mechanisms
would interact with existing bank capital requirements in a way that
would absolutely make it cost prohibitive for them to provide custody
services for crypto assets.
To be clear, even this special interest group has expressed support
for the disclosure guidance in SAB 121. They are only concerned about
how the accounting guidance applies to their balance sheet.
In fact, a letter sent by the special interest group requests
``targeted modifications'' to address this concern.
Mr. Speaker, I include in the Record a letter from the Bank Policy
Institute, the American Bankers Association, the Financial Services
Forum, and the Securities Industry and Financial Markets Association.

February 14, 2024.
Hon. Gary Gensler,
Chair, U.S. Securities and Exchange Commission, Washington,
DC.
Dear Chair Gensler: The Bank Policy Institute (``BPI''),
the American Bankers Association (``ABA''), the Financial
Services Forum (``the Forum''), and the Securities Industry
and Financial Markets Association (``SIFMA'') (collectively,
the ``Associations'') write to request that the Securities
and Exchange Commission (``Commission'') consider targeted
modifications to Staff Accounting Bulletin No. 121 (``SAB
121'') to address recent policy developments and the
challenges that SAB 121 has posed for U.S. banking
organizations since it was issued on March 31, 2022.
As the two-year anniversary of the issuance of SAB 121
approaches, the Associations believe now would be an
appropriate time to examine and discuss the implications of
SAB 121 for regulated banking organizations. There have been
several relevant developments during this two year period,
including the GAO report issued in October, approval of
certain Spot Bitcoin ETPs, and the SEC's proposed rule on
Safeguarding Advisory Client Assets that would cover the
custody of digital assets if finalized as proposed. The
Associations believe that SAB 121 can be modified to mitigate
the specific challenges identified herein without undermining
the stated policy objectives of the Commission to enhance the
information received by investors and other users of
financial statements.
The Associations are happy to continue to serve as a
resource and work collaboratively with the Commission to
provide recommendations that would ensure that investors are
provided the requisite disclosures while allowing responsible
innovation to occur. The Associations and Commission share
the common goals of ensuring the highest levels of investor
protection and implementing policies that advance principles
of market integrity and financial stability.
We believe the recommendations set forth in this letter are
consistent with those principles and would remove unintended
barriers for well-regulated U.S. banking organizations to
engage in certain activities. Below we describe the drivers
behind this request and suggest targeted modifications to SAB
121.

I. Background

Since SAB 121 was issued in 2022, the Associations have
articulated their concerns regarding the Bulletin to the
Commission both in writing and in meetings with Commission
staff. The foremost concern identified and discussed is how
the on-balance sheet requirement of SAB 121 negatively
impacts U.S. banking organizations and investors due to the
associated prudential implications. The Associations have
underscored that on-balance sheet treatment will preclude
highly regulated banking organizations from providing a
custodial solution for digital assets at scale. Moreover, the
Associations have highlighted that the on-balance sheet
requirement, coupled with the overly-broad definition of
``crypto-asset'' in SAB 121, will have a chilling effect on
banking organizations' ability to develop responsible use
cases for distributed ledger technology (DLT) more broadly.
U.S. banking organizations' experience over the past two
years has confirmed that SAB 121 has curbed the ability of
the Associations' members to develop and bring to market at
scale certain digital asset products and services. In
comparison, in-scope entities of SAB 121 other than U.S,
banking organizations have not suffered the same effects. For
example, digital asset custodial services are currently
offered by various non-banking organizations, thereby keeping
activity outside the prudential perimeter and avoiding the
necessary oversight by regulators. Indeed, if regulated
banking organizations are effectively precluded from
providing digital asset safeguarding services at scale,
investors and customers, and ultimately the financial system,
will be worse off, with the market limited to custody
providers that do not afford their customers the legal and
supervisory protections provided by federally-regulated
banking organizations. The Associations continue to urge the
Commission to work with industry to adopt solutions that
could mitigate the described challenges.

II. Concrete Examples of the Impact of SAB 121 on U.S. Banking
Organizations

[[Page H2952]]

DLT-based projects due to the breadth of the definition of
``crypto-asset'' in SAB 121: ``a digital asset that is issued
and/or transferred using distributed ledger or blockchain
technology using cryptographic techniques.'' Under this
definition, a traditional financial asset issued or
transferred using DLT could be considered a ``crypto asset''
and thus within scope of SAB 121, regardless of the
applicable risks. SAB 121 makes no distinction between asset
types and use cases, but instead generally states that
crypto-assets pose certain technological, legal, and
regulatory risks requiring on-balance sheet treatment.
However, there are significant differences between a
cryptocurrency like Bitcoin that exists on a public,
permissionless network versus a traditional financial
instrument that is recorded on a blockchain network where
access is controlled and transactions can be cancelled,
corrected, or amended. The past two years have underscored
these differences, as the turmoil in the crypto market has
been wholly unrelated to banks' use of permissioned DLT. DLT
does not change the underlying nature or risks of traditional
assets, nor do they present the risks SAB 121 purports to
address, and thus SAB 121's application to those assets
should be reconsidered. Clear indication from the Commission
that the use of DLT to record or transfer traditional
financial assets is consistently outside the scope of SAB 121
would alleviate associated challenges.

III. Proposed Modifications and Clarifications

The Associations request that the Commission consider the
following targeted modifications to SAB 121 to address the
above concerns:
Narrow the definition of ``crypto-assets'' to clarify and
confirm the exclusion of certain asset types and use cases.
SAB 121 is premised on the risks posed exclusively by
cryptocurrencies, and traditional financial assets recorded
or transferred using blockchain networks should be excluded
because they do not present the same risks as
cryptocurrencies; the use of DLT does not change the
underlying nature or risk of traditional assets. Moreover,
certain exclusions for products wherein the underlying
activity relates to the offering of a Commission-approved
product should be clarified.
Exempt banking organizations from on-balance sheet
treatment but maintain the disclosure requirements: As
described previously, SAB 121 answers three questions, and
the Associations' and its members' are primarily concerned
with the first question: how an entity should account for its
obligations to safeguard crypto-assets (the on-balance sheet
treatment). We do not object to the requirements imposed in
the answer to the second question (disclosures in Fnancial
statements). Exempting banking organizations from the on-
balance sheet treatment but requiring them to make certain
disclosures about their digital activity would mitigate the
concerns raised by banking organizations without undermining
the goal of SAB 121 to promote disclosures to investors.
Balance sheet disclosure may be appropriate where the
controls are not adequate to protect investors from the risk
of custodied assets, which is not the case for banking
organizations that are subject to robust oversight from the
federal banking agencies. The required disclosures in the
answer to the second question are broad and may include
disclosures in the description of business, risk factors, and
management's discussion and analysis of financial condition
and results of operation, and such information will still
``enhance the information received by investors and other
users of financial statements about these risks, thereby
assisting them in making investment and other capital
allocation decisions.''

IV. Conclusion

The Associations and their members appreciate your
attention to the issues raised in this letter. Given the
upcoming two-year anniversary of the issuance of SAB 121,
certain policy developments, the experience of U.S. banking
organizations, and the evolution in technology since the
guidance was first issued, we believe it is an appropriate
time to reflect on the intended goals of SAB 121. We request
a meeting with you and Commission staff to discuss the issues
and proposed modifications set forth above.
We appreciate the Commission's attention to this important
topic and look forward to engaging with you further.
Respectfully submitted,
Bank Policy Institute,
American Bankers Association,
Financial Services Forum,
Securities Industry and Financial Markets Association.

Ms. WATERS. Mr. Speaker, this bill does far more than implement
targeted modifications, as this letter proposes.
This CRA resolution would overturn all of SAB 121, not just the part
that this special interest group has complained about.
Mr. Speaker, I am curious whether my colleagues on the other side of
the aisle have actually read this letter from the special interest
group that they are trying to pander to or whether they are bothered to
consult the largest custody bank in the United States, the Bank of New
York Mellon, which holds in custody more than $45 trillion in customer
assets because they told me that they do not want this CRA and did not
push for it in any way because they share our concerns about the bill
being overly broad.

{time} 1230

The consequences of using a CRA, rather than a more narrowly tailored
bill, go beyond simply overturning SAB 121 entirely when the
aforementioned concerns from special interests only have to do with one
little piece of it.
If this resolution is passed, the SEC would be prohibited from
issuing any guidance in the future that is substantially similar to
this one, including disclosure guidance on this issue. This means that
the SEC would not be able to simply turn around and narrowly address
this one little concern while preserving the rest of the guidance. It
also means that while the crypto industry clamors for the SEC to
provide for clarity, this resolution would tie the SEC's hands, making
it harder for them to provide the clarity that the industry purportedly
wants.
I am further concerned that if this resolution is passed, industry
and investors alike will no longer be able to receive timely guidance
from the SEC staff, as this resolution is also intended to be a
warning. Passing this resolution would have broad and negative
consequences for all public companies and their investors, with
implications for the entire securities market, not just crypto.
The SEC has issued numerous staff accounting bulletins. The one being
repealed today is No. 121, which has helped companies understand how
SEC rules apply in specific situations.
If the SEC were to pull back in this regard, it would be particularly
harmful to smaller companies with less resources dedicated to
compliance and could result in more enforcement actions as they
struggle to understand how to best comply with SEC rules.
Chairman McHenry and I have worked well together to find common
ground on crypto issues like stablecoins. However, instead of finding
ways to work together, Republicans are recklessly pushing this harmful,
partisan resolution.
Let us not forget, the SEC is our cop on the block and should be
supported because they protect our investors.
Mr. Speaker, I urge my colleagues to oppose this bill, and I reserve
the balance of my time.
Mr. McHENRY. Mr. Speaker, I include in the Record the Government
Accountability Office's October 31, 2023, decision on the
``Applicability of the Congressional Review Act to Staff Accounting
Bulletin No. 121,'' which can be found online at: https://www.gao.gov/
assets/870/862501.pdf.
The decision makes clear that the accusations that the ranking member
is making about how broad this is are simply not the case. It is a very
targeted removal of the staff accounting bulletin that broadly affects
digital assets, not one bank.
Mr. Speaker, I yield 3 minutes to the gentleman from Nebraska (Mr.
Flood), the sponsor of the resolution and a leader on innovation on the
Financial Services Committee and broader policy.
Mr. FLOOD. Mr. Speaker, I thank Chairman McHenry for yielding.
I am pleased to speak in support of my bipartisan resolution, H.J.
Res. 109, a Congressional Review Act resolution for the SEC's Staff
Accounting Bulletin No. 121, or SAB 121 for short.
I thank Congressman Nickel and Senator Lummis for working with me on
this resolution and for the chairman's leadership in getting this to
the floor.
This is something of a complicated issue, as you have heard today, so
I will break it down into a few different components.
First, I will begin by explaining what a staff accounting bulletin
is. Staff accounting bulletins are technical accounting guidance for
public entities. They are typically noncontroversial in nature and,
importantly for this debate, are not rules. Guidance is not supposed to
dictate a major change in policy. That is what our notice-and-comment
rulemaking process is for.
This specific bulletin effectively requires banks to put digital
assets held in custody on their balance sheet. Simply put, that is not
how custody usually works.

[[Page H2953]]

As a Federal Reserve Chairman once said: ``Custody assets are off
balance sheet, always have been.''
This bulletin upends custodial practice for banks, and it effectively
keeps banks out of this market entirely. That is not good for consumers
or investors.
Next, let's talk about the process, as the chairman has already
mentioned. There were two major process fouls by the SEC in issuing SAB
121.
Number one, the SEC is not a bank regulator, and SAB 121 affects a
core banking activity: custody. Yet, the SEC issued this bulletin
without even talking to the regulators first. Think about that. The SEC
issued this without even talking to the prudential regulators. That is
an incredible oversight, particularly given the bulletin's unusual
treatment of custodial assets.
Number two, the nonpartisan Government Accountability Office
determined that this bulletin is effectively a rule. In other words,
the SEC got caught trying to circumvent the APA and the due diligence
requirements that come with it.
Now, let's talk about solutions. The easiest way to fix this problem
is for the SEC to simply rescind the bulletin themselves and work with
the prudential regulators on an alternate solution.
Despite the fact that this bulletin was issued through a faulty
process and despite the negative ramifications of keeping banks from
taking custody of retail investor assets, the SEC has been unwilling to
have any conversation about making changes.
That leaves us with no choice. Congress needs to act through the
Congressional Review Act to rescind SAB 121.
Finally, let me briefly address an argument that Ranking Member
Waters and some of my Democratic colleagues have made on this issue. I
have heard this argument that the CRA should not be applied to an
accounting bulletin, but let's contemplate the alternative. What are
the implications if we fail to pass this resolution?

This is an instance where the nonpartisan GAO outright said the SEC
circumvented the proper regulatory process.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. McHENRY. Mr. Speaker, I yield an additional 1 minute to the
gentleman from Nebraska.
Mr. FLOOD. Mr. Speaker, think about why the Congressional Review Act
was passed in the first place: to give Congress the ability to check a
regulator that has gone astray. If we don't pass this resolution, we
are effectively giving the green light to our regulators to bypass the
APA rulemaking process with impunity.
This isn't just about the SEC or bank custody. This is about
providing a necessary check to executive branch power. Regardless of
your feelings on the banking policy or the SEC, I urge my colleagues to
support this resolution for the sake of upholding the authority of the
institution we serve in.
Mr. Speaker, I include in the Record four letters.
Number one is a letter dated April 27, 2023, sent by Fed Vice Chair
Michael Barr to Senator Lummis, discussing the impact of SAB 121 on
Fed-regulated financial institutions.
Number two is a letter dated April 18, 2023, sent by FDIC Chairman
Gruenberg to Chairman McHenry and Senator Lummis, in response to their
March 2, 2023, letter.
Number three is a letter dated February 28, 2024, sent by the
Conference of State Bank Supervisors to Chairman McHenry and Ranking
Member Waters, outlining the unintended effects SAB 121 could pose on
consumers and markets.
Board of Governors of the

Federal Reserve System,

Washington, DC, April 27, 2023.
Hon. Cynthia M. Lummis,
U.S. Senate,
Washington, DC.
Dear Senator: Thank you for your letter dated March 2,
2023, regarding the Securities and Exchange Commission (SEC)
Staff Accounting Bulletin 121 (``SAB 121'') published on
April 11, 2022.
As you know, the Federal Reserve is not responsible for the
general accounting policy for public companies and, as such,
Federal Reserve staff were not consulted by the SEC regarding
the development and issuance of SAB 121. For accounting and
reporting purposes under U.S. generally accepted accounting
principles (GAAP), assets held in custody are generally not
recognized on the custodian's balance sheet--as the custodian
does not control the assets--and we defer to the SEC on these
matters. However, I would note that state member banks may
provide safekeeping services, in a custodial capacity, for
crypto-assets if conducted in a safe and sound manner and in
compliance with consumer, anti-money laundering, and anti-
terrorist financing laws.
By law, regulatory reports and statements required to be
filed with Federal banking agencies by all insured depository
institutions must be uniform and consistent with U.S. GAAP.
In light of SAB 121, the Federal Financial Institutions
Examination Council (FFIEC) issued supplemental instructions
to the Call Report related to SAB 121. The supplemental
instructions state that an institution that determines that
it is appropriate for it to apply SAB 121 for SEC or other
financial reporting purposes should complete its Call Report
consistent with the classification determination made for SEC
or other financial reporting purposes. Institutions are
encouraged to consult with SEC staff on the scope and
applicability of SAB 121.
The Basel Committee's prudential treatment of crypto-asset
exposures applies to various types of exposures to banks,
such as exposures held as securities on balance sheet or
through derivatives. However, the Basel standard does not
generally apply to custodial assets.
The Federal Reserve continues to take a careful and
cautious approach related to current or proposed crypto-
asset-related activities at each banking organization and
will continue to ensure that legally permissible activities
are conducted in a manner that is safe and sound, and in
compliance with applicable laws and regulations, including
those designed to protect consumers.
Sincerely,
Michael S. Barr.
____

Federal Deposit

Insurance Corporation,

Washington, DC, April 18, 2023.
Hon. Cynthia M. Lummis,
Committee on Banking, Housing, and Urban Affairs, U.S.
Senate, Washington, DC.
Hon. Patrick McHenry,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Senator Lummis and Chairman McHenry: Thank you for
your letter of March 2, 2023, to the Federal Deposit
Insurance Corporation (FDIC) regarding the accounting and
regulatory capital implications of the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin 121 (SAB
121).
FDIC staff was not consulted by the SEC before the issuance
of SAB 121 and has not been advised of any plans by the SEC
to modify or withdraw SAB 121. By law, regulatory reports and
statements required to be filed with Federal banking agencies
by all insured depository institutions must be uniform and
prepared in a manner that is no less stringent than U.S.
generally accepted accounting principles (GAAP). In
accordance with U.S. GAAP, assets held in custody are
generally not recognized on the custodian's balance sheet,
because custodial assets provide no economic benefit to the
custodian and the custodian does not control the assets.
Beginning in June 2022, the Federal Financial Institutions
Examination Council, of which the FDIC is a member, issued
Supplemental Instructions for the Consolidated Reports of
Condition and Income (Call Report). Those instructions state:
``An institution that determines that it is appropriate for
it to apply SAB 121 for SEC or other financial reporting
purposes should complete its Call Report consistent with the
classification determination made for SEC or other financial
reporting purposes.'' The FDIC encourages institutions to
consult with SEC staff on the scope and applicability of SAB
121. Reporting custodial assets on-balance sheet in
accordance with SAB 121 would be no less stringent than U.S.
GAAP.
The Basel Committee on Banking Supervision (BCBS) published
its final standard on the prudential treatment of crypto-
asset exposures in December 2022. The BCBS standard outlines
that consistent with the leverage ratio standard, crypto-
assets are included in the leverage ratio exposure measure
according to their value for financial reporting purposes,
based on applicable accounting treatment for exposures that
have similar characteristics. The standard states that
crypto-asset exposures include on- or off-balance sheet
amounts that give rise to credit, market, operational and/or
liquidity risks. Certain parts of the standards, such as
those related to operational risk, are also applicable to
banks' crypto-asset activities. The FDIC does not view the
BCBS standard as being in conflict with the SEC's SAB 121,
although the agency does acknowledge that the SEC's SAB 121
would require institutions to hold capital against custodied
crypto-assets.
The FDIC continues to actively monitor activities
associated with digital asset by regulated banking
organizations that includes digital asset custodial
activities. The FDIC will continue to ensure that legally
permissible activities are conducted in a safe and sound
manner and in compliance with applicable laws and
regulations, including those designed to protect consumers.
Your interest in this matter is appreciated. If you have
additional comments or questions, please contact me or Andy
Jiminez, Director, Office of Legislative Affairs.
Sincerely,
Martin J. Gruenberg.

[[Page H2954]]

____
CSBS,

Washington, DC, February 28, 2024.
Hon. Patrick McHenry,
Chairman, House Financial Services Committee, Washington, DC.
Hon. Maxine Waters,
Ranking Member, House Financial Services Committee,
Washington, DC.
Chairman McHenry and Ranking Member Waters: On behalf of
the Conference of State Bank Supervisors, I write to relay
our concerns with the U.S. Securities and Exchange
Commission's (SEC) Staff Accounting Bulletin 121 (``SAB
121,'' or ``the Bulletin''). The Bulletin, issued without
public consultation, unilaterally upends traditional
custodial accounting obligations. As written, SAB 121 could
lead to significant downstream effects for custodial firms
subject to prudential regulation.
State regulators strongly support appropriate customer
protections and a safe and sound financial system. Further,
we appreciate the SEC's effort to provide guidance concerning
novel activities such as custodial services for ``crypto-
assets.'' However, decisions with wide-ranging implications
across the banking sector should be made in consultation with
prudential regulators at both the state and federal level and
only after an opportunity for public notice-and-comment. As
the Government Accountability Office (GAO) ruled in October
2023, SAB 121 qualifies as a rule under the Administrative
Procedure Act (APA) and, as such, should have been made
available for public comment.
While custodial activities may have once elicited images of
only safe deposit boxes holding valuable physical objects,
today's banks hold a variety of both physical and electronic
assets. More recently, bank customers have been increasingly
interested in banks' ability to custody crypto-assets,
including cryptographic keys. While the nature of the
underlying assets may change and prudential risk management
requirements may vary from asset to asset, the accounting and
regulatory principles applicable to such custodial assets
should be consistent. In unilaterally departing from well-
established accounting principles for safeguarding custodial
crypto-assets, SAB 121 ignores existing regulatory frameworks
in place to ensure custodial activity is conducted in a safe
and sound manner.
Failure to take public comment or consult with other
regulators on a cross-jurisdictional issue like this could
result in substantial unintended consequences. Two areas of
potential side effects from this opaque rulemaking include:
Potential Asset Concentration. The Bulletin requires on-
balance sheet accounting of crypto-assets under custody,
which is a significant departure from the treatment of other
assets held under custody. Due to the prudential regulatory
implications of on-balance sheet accounting, this would
likely require custodial institutions to raise significant
funds to maintain adequate leverage ratios--a step many
industry participants have indicated would be prohibitive to
providing these custodial services for customers. Not only is
this model inconsistent with the principle that similar
activities should be regulated in a similar manner, but it
could also result in an unnecessary and potentially risky
concentration of custodial assets outside of prudentially
regulated institutions.
Loss of Insolvency Protections for Customers. Applying on-
balance sheet treatment for crypto-assets may inappropriately
subject customer assets to creditors' claims in the event of
the insolvency of an institution offering custody products
and services. In a traditional bankruptcy proceeding, assets
accounted for on-balance sheet are typically subject to
creditor claims. Conversely, assets held in custody for the
benefit of customers are considered accounted for off-balance
sheet--and thus protected in bankruptcy--because they remain
the assets of the customer. Requiring custodied crypto-assets
to be accounted for on-balance sheet risks losing the
bankruptcy remote protections of custody services. This is an
important distinction from the treatment for a broker-dealer
that would be subject to a different form of bankruptcy under
the Securities Investor Protection Act.
These are only two unintended side effects that SAB 121
could impose on markets and consumers in an evolving
technological environment.
History repeatedly demonstrates the shortcomings of
rulemaking in a vacuum. Without significant consultation with
peer regulators and comments from the broader public, these
types of missteps are all too common, particularly with new
and innovative technologies. We support robust consumer and
market protections in this growing and evolving asset class
and stand ready to provide Congress and our federal
regulatory partners with our experience and expertise.
However, given the lack of adequate consultation and
opportunity for public comment, and the potential for
significant detrimental effects, we have significant concerns
with SAB 121.
Sincerely,
Brandon Milhorn,
President and CEO.

Mr. FLOOD. Mr. Speaker, number four is a letter dated February 29,
2024, sent by the American Bankers Association to Chairman McHenry and
Ranking Member Waters, expressing support for H.J. Res. 109.

American Bankers Association,

Washington, DC, February 29, 2024.
Re Providing for congressional disapproval under chapter 8 of
title 5, United States Code, of the rule submitted by the
Securities and Exchange Commission relating to ``Staff
Accounting'' Bulletin No. 121'' (H.J. Res. 109).

Hon. Patrick McHenry,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Hon. Maxine Waters,
Ranking Member, Committee on Financial Services, House of
Representatives, Washington, DC.
Dear Chairman McHenry and Ranking Member Waters: The
American Bankers Association (ABA) welcomes and supports H.J.
Res. 109, the Congressional Review Act resolution of
disapproval for the Securities and Exchange Commission
``Staff Accounting Bulletin 121.'' which was recently
introduced by Reps. Mike and Flood (R-NE) and Wiley Nickel
(D-NC).

Adverse Impact of SAB 121 on Bank Digital Asset Products and Services

In March 2022, the Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin 121 (SAB 121) to address
perceived risks to publicly traded companies that safeguard
crypto assets for their customers. Under SAB 121, an entity
responsible for safeguarding cryptocurrency assets for
platform users must present a liability on its balance sheet
at fair value to reflect that obligation, as well as a
corresponding asset. SAB 121 is a departure from the banking
industry's historical practice of treating custody assets
off-balance sheet, and this accounting treatment effectively
precludes banks from offering digital asset custody at scale
since placing the value of client assets on balance sheet
will impact prudential requirements such as capital,
liquidity, and other mandates.
On February 14, 2024, ABA joined with several other
financial trades in a joint letter to the SEC. In the letter,
we noted that U.S. banking organizations' experience over the
past two years with SAB 121 shows that it has curbed the
ability of our members to develop and bring to market at
scale certain digital asset products and services. We gave
two concrete examples:
(1) Spot Bitcoin ETPs
The Commission recently approved Spot Bitcoin Exchange
Traded Products (ETPs), allowing investors access to this
asset class through a regulated product. However, notably
absent from those approved products are banking organizations
serving as the asset custodian, a role they regularly play
for most other ETPs. These ETPs have already experienced
billions of dollars in inflows, but it is practically
impossible for banks to serve as custodian for those ETPs at
scale due to the Tier 1 capital ratio and other reserve and
capital requirements that result from SAB 121. This raises
important questions about the safety and stability of this
ecosystem.
We believe that this result could raise concentration risk,
as one nonbank entity now serves as the custodian for the
majority of these ETPs. That risk can be mitigated if
prudentially regulated banking organizations have the same
ability to provide custodial services for Commission
regulated ETPs as qualified nonbank asset custodians. SAB 121
does not appear to contemplate this type of concentration
risk, in part perhaps because Spot Bitcoin ETPs or similar
products were not an approved product at the time SAB 121 was
issued.
(2) Use of DLT to record traditional financial assets
Banking organizations are increasingly exploring the use of
Distributed Ledger Technology (DLT) to record traditional
financial assets, such as bonds. The use of DLT has the
potential to expedite and automate payment, clearing,
reconciliation and settlement services, and multiple central
banks outside the United States are partnering with banks to
explore the adoption of DLT. However, SAB 121 has proven to
be a barrier to banking organizations' ability to
meaningfully engage in DLT-based projects due to the breadth
of the definition of ``crypto-asset'' in SAB 121: ``a digital
asset that is issued and/or transferred using distributed
ledger or blockchain technology using cryptographic
techniques.''
Under this definition, a traditional financial asset issued
or transferred using DLT could be considered a ``crypto
asset'' and thus within scope of SAB 121, regardless of the
applicable risks. SAB 121 makes no distinction between asset
types and use cases, but instead generally states that
crypto-assets pose certain technological, legal, and
regulatory risks requiring on-balance sheet treatment.
However, there are significant differences between a
cryptocurrency like Bitcoin that exists on a public,
permissionless network versus a traditional financial
instrument that is recorded on a blockchain network where
access is controlled and transactions can be cancelled,
corrected, or amended.
The past two years have underscored these differences, as
the turmoil in the crypto market has been wholly unrelated to
banks' use of permissioned DLT. DLT does not change the
underlying nature or risks of traditional assets, nor do they
present the risks SAB 121 purports to address, and thus SAB
121's application to those assets should be reconsidered.
Clear indication from the Commission that the use of DLT to
record or transfer traditional financial assets is
consistently outside the scope of SAB 121 would alleviate
associated challenges.
In the February 14 letter, we made several recommendations
for changes to SAB 121

[[Page H2955]]

that would mitigate the specific challenges identified above
without undermining the stated policy objectives of the SEC
to enhance the information received by investors and other
users of financial statements. We also asked for a meeting to
discuss those changes, but as yet have not had a response
from the SEC.

Adverse Consequences for Consumers

Banks have long provided safe and well-regulated custody
services to investors for securities and other assets.
However, the implications of SAB 121 mean few banks are
currently offering custody services for digital assets,
leaving consumers with few options for a safe, well-regulated
custody service for digital assets.
In fact, many have turned to non-bank market entrants that
are not subject to prudential regulation and examination and
are not subject to robust capital and liquidity requirements.
This unregulated activity can expose consumers and
counterparties to significant harm.

Conclusion

We applaud Representatives Flood and Nickel for their
leadership on this important issue. The SEC's Staff
Accounting Bulletin 121 represents a significant departure
from longstanding accounting treatment for custodied assets
and threatens the banking industry's ability to provide its
customers with safe and sound custody of digital assets,
Limiting banks' ability to offer these services leaves
consumers with few well-regulated, trusted options for their
digital asset portfolios and ultimately exposes them to risk.
We encourage you and your membership to favorably report
this resolution out of the Committee. We would be pleased to
meet with you and your staff to discuss how Staff Accounting
Bulletin 121 inhibits consumer access to safe, sounds access
to digital asset custody services.
Sincerely,

Kirsten Sutton,

Executive Vice President,
American Bankers Association.

Ms. WATERS. Mr. Speaker, I yield myself such time as I may consume.
This is my response to the gentleman from Nebraska. My Republican
colleagues have claimed that the SEC failed to consult with prudential
regulators on SAB 121, but if this resolution is passed, the SEC will
effectively be barred from consulting with prudential regulators in
order to issue revised guidance on this matter.
Again, the plain consequences of this bill do not match the purported
goals of the bill's sponsor and supporters. If Republicans wanted the
SEC to consult with prudential regulators and reissue modified
guidance, they should do that. This bill does the opposite. It actually
prevents the SEC from consulting with prudential regulators in order to
reissue modified guidance.
Mr. Speaker, I yield 5 minutes to the gentleman from California (Mr.
Sherman), who is also the ranking member of the Subcommittee on Capital
Markets.
Mr. SHERMAN. Mr. Speaker, the crypto industry comes before our
committee almost every week saying: We want clarity. Then the SEC
provides the clarity. Now, the friends of crypto are here to abolish
the clarity, to not only take away release 121, which requires that the
custodians of crypto indicate that on the balance sheet, but to prevent
the SEC from issuing a revised version of 121 that could call for that
same disclosure to be made in footnotes.
It is very clear to me, as co-chair of the bipartisan CPA Caucus,
that the financial statements must reflect the incredible risk that
banks take when they become custodians of billions and hundreds of
billions of dollars, supposedly, worth of crypto.
Now, why the uniqueness of crypto? We have seen Sam Bankman-Fried. He
was the face of crypto. He is now facing only a quarter century in
jail, which seems rather light. The crypto industry would tell us that
Sam Bankman-Fried was just a single snake in the crypto Garden of Eden.
The fact is, we have learned since Sam Bankman-Fried's indictments that
crypto is a garden of snakes. It is uniquely problematic. Why is that?
Because crypto's whole purpose is to facilitate evading American law
and to help criminals. Who does it attract? It attracts criminals.
What is the comparative advantage that crypto has as it attempts to
become a currency and partially displace the dollar and the euro? Is it
more stable? Certainly not. Is it more useful to buy something? You can
go to Rayburn and buy a sandwich for $1--well, okay, $8, but you can't
buy a sandwich anywhere in this complex for a bitcoin. It is not a
better medium of exchange. It is not a better measure of value. What
advantage does it have? It is secret.
Now, the best way to have their secrecy is to have the iceberg above
the water be available and visible and then to have under the water
seven-eighths of the crypto subject to being hidden from the know-your-
customer and anti-money-laundering laws.
So how can the crypto compete with the dollar, aspire to become a
currency, and compete with the best currency in the world? By tapping
into the markets that don't want to be surveilled by the U.S.
Government. What are those? Obviously, the sanctions evaders, the drug
dealers, and the human traffickers, but that is not a big enough market
for crypto. They want the tax evasion market.
The IRS Commissioner under Donald Trump testified that we are losing
a trillion dollars in revenue. That means that those who are cheating
on taxes, almost all at the high end of the spectrum, have to hide $3
trillion of income each and every year. That is $30 trillion of hidden
income every decade. They can't do it with U.S. dollars, so crypto is
designed to fill that need.
Now, if you think it will be successful in doing that and you want to
bet against America and facilitate the undermining of American laws
while perhaps making a profit, you can buy crypto, but it is an asset
whose very nature creates an additional risk. That risk needs to be
shown in the financial statements of the custodian. This resolution
would prevent the SEC from causing that to be disclosed either on the
balance sheet or in the footnotes.

{time} 1245

If you doubt what the purpose is of crypto, then look at their latest
invention: the mixer.
What is the mixer?
It is designed to mix up law enforcement. It is a facility available
to every crypto owner to disguise their transactions and to hide from
American law enforcement.
Not only that, of course, crypto aspires and claims that they will
partially displace the dollar as the reserve currency. If it does that,
that will be a tremendous decline in America's power in the world and
the American economy.
So I see no reason for us to have rules that hide this risk from the
shareholders of the custodian.
The SPEAKER pro tempore. The time of the gentleman has expired.
Ms. WATERS. Mr. Speaker, I yield an additional 1 minute to the
gentleman from California.
Mr. SHERMAN. I see no reason for us to hide from those who are
looking at bank balance sheets the unique risk that they take in order
to facilitate a crypto ecosystem whose sole purpose and whose strategy
is to defeat the American Government whether it tries to collect taxes
or enforce our sanctions.
Mr. Speaker, if you have any doubt, look at what the proponents, the
visionaries, behind crypto say. They say that they are innovative. They
are trying to innovate a way to make sure that America cannot enforce
its sanctions, cannot deal with drug dealers, cannot enforce its taxes,
and, oh, by the way, particularly useful to Sam Bankman-Fried, cannot
enforce its bankruptcy laws.
Mr. McHENRY. Mr. Speaker, I would say to my colleagues that if they
want to fix the Sam Bankman-Fried FTX fraud and their ability to do
that again, then you need to pass the bill that we produced out of
committee that regulates crypto and provides regulatory agencies power.
Mr. Speaker, I yield 1 minute to the gentleman from Oklahoma (Mr.
Lucas), who is the chairman of the Science Committee and a great leader
on the Financial Services Committee.
Mr. LUCAS. Mr. Speaker, I thank the chairman for yielding.
Mr. Speaker, I support this bipartisan CRA to overturn the SEC's
Staff Accounting Bulletin 121.
SAB 121 has removed a bank's ability to offer custodial services for
digital assets and has prevented banks from exploring the use of
distributed ledger technologies.
The SEC issued SAB 121 unilaterally, outside the rulemaking process,
and without the consultation of the banking regulators.
This policy is not for the SEC to decide, and certainly not for the
SEC to

[[Page H2956]]

dictate through a broad interpretation of accounting practices.
The cost of and the availability of capital is dependent on the U.S.
banking system's ability to adapt to new technologies and to compete in
offering innovative products and services. SAB 121 has put up barriers
to that essential responsibility.
This CRA is an important correction to the SEC's misstep. I thank
Congressman Flood and Congressman Nickel for leading this effort.
Ms. WATERS. Mr. Speaker, I include in the Record a Statement of
Administration Policy from the White House.

Statement of Administration Policy

H.J. Res. 109--Congressional Disapproval of ``Staff Accounting Bulletin
No. 121'' Issued by the Securities and Exchange Commission--Rep. Flood,
R-NE, and four cosponsors

The Administration strongly opposes passage of H.J. Res.
109, which would disrupt the Securities and Exchange
Commission's (SEC) work to protect investors in crypto-asset
markets and to safeguard the broader financial system. H.J.
Res. 109 would invalidate SEC Staff Accounting Bulletin 121
(SAB 121), which reflects considered SEC staff views
regarding the accounting obligations of certain firms that
safeguard crypto-assets. Moreover, as explained in staff's
accompanying release, SAB 121 was issued in response to
demonstrated technological, legal, and regulatory risks that
have caused substantial losses to consumers. By virtue of
invoking the Congressional Review Act, it could also
inappropriately constrain the SEC's ability to ensure
approriate guardrails and address future issues related to
crypto-assets including financial stability. Limiting the
SEC's ability to maintain a comprehensive and effective
financial regulatory framework for crypto-assets would
introduce substantial financial instability and market
uncertainty.
If the President were presented with H.J. Res. 109, he
would veto it.

Ms. WATERS. The President states that the resolution before us would
``disrupt the Securities and Exchange Commission's work to protect
investors in crypto-asset markets and to safeguard the broader
financial system.''
This statement not only explains how terrible this resolution is, but
that the President of the United States of America will veto it.
Mr. Speaker, I yield 3 minutes to the gentleman from Massachusetts
(Mr. Lynch) who is also the ranking member of the Subcommittee on
Digital Assets, Financial Technology and Inclusion.
Mr. LYNCH. Mr. Speaker, I rise in strong opposition to H.J. Res. 109.
This misguided resolution would eliminate the Securities and Exchange
Commission's Staff Accounting Bulletin 121. This nonbinding,
interpretive guidance advises companies that are holding crypto assets
in custody for customers to record those assets as liabilities on their
balance sheets. It also recommends that companies disclose the nature
and the amount of their crypto-asset holdings. Simply put, it advises
caution and transparency regarding crypto because it is so volatile.
The disapproval of SAB 121 would have severe consequences in the U.S.
financial services industry and be especially dangerous for banks,
depositors, investors, and consumers. As underscored in the bulletin,
the safeguarding of crypto assets presents unique technological,
regulatory, and legal risks that could significantly impact a company's
financial condition and its operations. For this same reason, the
bulletin seeks to ensure that investors are informed about these risks
in making investment and other capital allocation decisions.
The failure of Silicon Valley Bank, Signature Bank, First Republic
Bank, and others have shown us that nervous depositors can cause a run
on bank assets when crypto assets become unstable. They can also move
money in the blink of an eye, which makes these banks less stable and
subject to failure.
With the collapse of FTX, the violation of Federal anti-money
laundering and sanctions laws by Binance, and legal issues facing
several other crypto companies, Staff Accounting Bulletin 121 serves to
protect investors.
Crypto is now in its 17th year, yet the primary use cases for crypto
continue to be money laundering, tax avoidance, cybercriminal
ransomware payments, and terrorist finance.
Regrettably, crypto has become a truly perfect example of a textbook
case of an elegant idea that is being continually savaged by an ugly
gang of facts.
Regrettably, the Republican leadership's efforts to curtail SEC
regulation in the crypto sector are now even extending to staff
bulletins that are simply advisory and designed to publicize staff
views regarding accounting-related disclosure practices.
This resolution also undermines the practice of issuing Staff
Accounting Bulletins for the benefit of small investors and firms that
may not have the resources to engage directly with the SEC and obtain
an individual opinion or advice.
As ranking member of the Digital Assets Subcommittee for the House
Financial Services Committee, I urge my colleagues to vote ``no.''
Mr. McHENRY. Mr. Speaker, I yield 3 minutes to the gentleman from
Kentucky (Mr. Barr), who is the chair of the Subcommittee on Financial
Institutions and Monetary Policy on the Financial Services Committee.
Mr. BARR. Mr. Speaker, I thank the chairman for his leadership on
this issue.
Mr. Speaker, I stand in front of you today to support my friend and
colleague from Nebraska (Mr. Flood) and his CRA resolution to nullify
the SEC's Staff Accounting Bulletin Number 121 which would eviscerate
financial institutions' ability to provide custodial services for
digital asset firms.
In theory, under SAB 121, a bank could custody digital assets.
However, the conditions set forth by SAB 121 make it impractical for
any bank. This very fact has been noted by Federal Reserve Board Chair
Powell who acknowledged it shifts away from traditional custodial
practices as custodial assets receive off-balance-sheet treatment.
SAB 121 overturns decades of precedent regarding the accounting
assets for banks. If a bank decides to custody digital assets and
adhere to SAB 121, then the on-balance-sheet requirement would have
significant capital, liquidity, and other prudential consequences. This
makes it difficult, at best, for regulated institutions to safeguard
digital assets.
The fact is that technological, legal, and regulatory risks cited in
SAB 121 are already addressed by the legal and regulatory framework
that applies to banks' custodial activities. Yet, SAB 121 did not
account for that.
Moreover, and disturbingly, the SEC did not consult with any of the
prudential regulators before issuing this flawed guidance.
Unfortunately, the failure to consult the regulators overseeing
institutions that are largely impacted by an SEC proposal has become
quite common under Chair Gensler.
The SEC does not have the expertise to assess the same risks as the
prudential regulators, and it is not the role of Gary Gensler to
propose misguided rulemakings and guidance that may have major adverse
implications to the functioning of our financial institutions, and
ultimately to the safety and soundness of our financial system.
Given the implications for financial institutions' ability to
safeguard assets under this rule and the clear lack of understanding
regarding their prudential standards and guidance from their primary
regulators, this rule is fatally flawed.
The fact of the matter is to the extent there is concern about a lack
of regulation, if there is concern about a lack of regulatory clarity
or risk with crypto, then we should not make it impossible, as a
practical matter, for well-regulated banks to protect Americans who own
digital assets with custody services.
Mr. Speaker, if you want to protect customers and if you want to
protect investors in digital assets, then we shouldn't be pushing
crypto transactions into less transparent and more opaque, riskier
offshore places, but that is exactly what SAB 121 would do.
I have to address this issue. Silicon Valley Bank's failure had to do
with deposit concentration risk and interest rate mismanagement. It had
nothing to do with the fact that many of its customers were technology
firms or worked in the blockchain space. It had nothing to do with
that. That is a red herring.
This is why I support Mr. Flood's measure, I support the bipartisan
work, and I encourage my colleagues to support it as well.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. McHENRY. Mr. Speaker, I yield an additional 30 seconds to the
gentleman from Kentucky.
Mr. BARR. Mr. Speaker, I thank the gentleman for yielding.

[[Page H2957]]

In conclusion, Mr. Speaker, I include in the Record a letter dated
March 2, 2023, cosigned by Chairman McHenry and Senator Lummis sent to
the Fed, OCC, FDIC, and NCUA asking them about SAB 121's impact on
regulated entities, and also asking if they were consulted prior to SAB
121's issuance.

Congress of the United States,

Washington, DC, March 2, 2023.
Re Prudential Impact of Staff Accounting Bulletin 121.

Hon. Michael Barr,
Vice Chair for Supervision, Board of Governors of the Federal
Reserve System, Washington, DC.
Mr. Michael Hsu,
Acting Comptroller, Office of the Comptroller of the
Currency, Washington, DC.
Hon. Marty Gruenberg,
Chairman of the Board, Federal Deposit Insurance Corporation,
Washington, DC.
Hon. Todd Harper,
Chairman of the Board, National Credit Union Administration,
Alexandria, VA.
Dear Vice Chair Barr, Chairman Gruenberg, Chairman Harper,
and Mr. Hsu: We write regarding Securities and Exchange
Commission (SEC) Staff Accounting Bulletin 121 (``SAB 121'')
published on April 11, 2022. SAB 121 was intended to clarify
the accounting treatment of digital assets safeguarded by
custodians, exchanges, and other platforms engaged in digital
asset activities. However, 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.
Our concern stems from SAB 121's directive that companies
recognize a liability and a corresponding offset on their
balance sheets, measured at the fair value of the customer
custodial digital assets. A recent decision in the Celsius
bankruptcy, which classified all Celsius' customers as
unsecured creditors, and therefore at the back of the line to
recover their assets, highlights the legal risk of
effectively forcing customer custodial assets to be placed on
balance sheet. Additionally, SAB 121 upends decades of
precedent regarding the accounting treatment of custodial
assets for banks, credit unions and other regulated financial
institutions.
Federal Reserve Board Chair Powell noted this shift away
from traditional custodial practices in testimony before the
Senate Banking Committee on June 22, 2022. Typically,
custodial assets receive off-balance sheet accounting
treatment. This is largely because customers retain ownership
of their custodial assets and financial institutions are not
permitted to conduct proprietary trading with customer
assets. As emphasized in comment letters, SAB 121 ``deviates
from existing accounting treatment of safeguarded assets held
in a custodial capacity, which does not result in assets or
liabilities reported on the custodian's balance sheet.''
Furthermore, the breadth of the ``digital asset''
definition in SAB 121 covers any ``digital asset that is
issued and/or transferred using distributed ledger or
blockchain technology using cryptographic techniques.'' The
scope of assets covered by this broad definition, whether
virtual currency, stablecoins, or even tokenized equities, is
unclear. This is concerning because a more nuanced hierarchy
for this asset class which considers the opportunities and
risks of digital assets with different functions is
necessary. For example, the Bank for International
Settlements' Prudential Treatment of Crypto Assets framework
differentiates between various types of digital assets for
bank capital purposes.
Since SAB 121 purports to require banks, credit unions and
other financial institutions to effectively place digital
assets on their balance sheets, it would trigger a massive
capital charge. This in turn is likely to prevent these
prudentially regulated entities from engaging in digital
asset custody. To the contrary, we should be encouraging
prudentially regulated financial institutions, like banks and
credit unions, to provide digital asset services precisely
because they are subject to the highest standards of capital,
liquidity, recovery and resolution, custody, cyber-security,
and risk management.
In sum, the effect of SAB 121 is to deny millions of
Americans access to safe and secure custodial arrangements
for digital assets. For these reasons, please respond to the
following questions regarding the impact of SAB 121 on banks,
credit unions, and other financial institutions:
(1) Was your agency contacted by the SEC prior to the
issuance of SAB 121? If so, please identify the staff members
consulted by the SEC and provide copies of written feedback,
if any, provided to SEC staff.
(2) Has the SEC indicated that it will modify or withdraw
SAB 121 in light of widespread comments that the Bulletin is
flawed?
(3) What are the legal and supervisory reasons off-balance
sheet treatment of custodial assets has historically been the
norm for banks and credit unions?
(4) Has your agency directed banks and other financial
institutions within your jurisdiction to comply with the
terms of SAB 121 for the purposes of capital adequacy,
business plan change approvals, reporting and other
supervisory matters? If not, do you plan to do so?
(5) Does SAB 121 conflict with your agency's input
regarding the Basel Committee on Bank Supervision's
Prudential Treatment for Crypto Asset exposures, in so far as
the definition of ``digital asset'' under SAB 121 also
encompasses Group 1a, Group 1b, and Group 2 digital assets
under the Prudential Treatment framework?
(6) Do you agree that the capital charge for banks, credit
unions, and other financial institutions under SAB 121 is
prohibitive?
(7) Do you 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?
We would appreciate a response no later than March 16,
2023. Thank you for your attention to this matter.
Sincerely,
Sen. Cynthia M. Lummis,
Senate Banking Committee.
Rep. Patrick McHenry,
Chairman, House Financial Services Committee.

Mr. BARR. Mr. Speaker, I include in the Record a letter dated April
6, 2023, sent by OCC Acting Comptroller Hsu to Chairman McHenry and
Senator Lummis in response to their March 2, 2023, letter.

Office of the Comptroller

of the Currency,

April 6, 2023.
Hon. Cynthia Lummis,
Committee on Banking, Housing, and Urban Affairs, U.S.
Senate, Washington, DC.
Hon. Patrick McHenry,
Chairman, Committee on Financial Services, U.S. House of
Representatives, Washington, DC.
Dear Senator Lummis and Chairman McHenry: Thank you for
your letter dated March 2, 2023, concerning the impact of the
Securities and Exchange Commission (SEC) Staff Accounting
Bulletin Number 121 (SAB 121) on institutions regulated by
the Office of the Comptroller of the Currency (OCC).
The OCC recognizes that the SEC plays an important role in
developing financial reporting standards applicable to
publicly listed companies in the United States. Federal law
(12 U.S.C.1831n) requires all national banks and federal
savings associations to follow reporting standards that are
no less stringent than U.S. Generally Accepted Accounting
Principles (GAAP), regardless of public listing status. We
understand that these institutions, in consultation with
their auditors, are analyzing the intersection of SAB 121 and
GAAP. The OCC is monitoring these discussions.
Please see responses below to your specific questions.
(1) Was your agency contacted by the SEC prior to the
issuance of SAB 121? If so, please identify the staff members
consulted by the SEC and provide copies of written feedback,
if any, provided to SEC staff.
The SEC did not consult with the OCC prior to the issuance
of SAB 121.
(2) Has the SEC indicated that it will modify or withdraw
SAB 121 in light of widespread comments that the Bulletin is
flawed?
The OCC has not participated in any communications with the
SEC in which the SEC indicated it would modify or withdraw
SAB 121.
(3) What are the legal and supervisory reasons off-balance
sheet treatment of custodial assets has historically been the
norm for banks and credit unions?
Section 37(a) of the Federal Deposit Insurance Act (12
U.S.C. 183n(a)) requires that the Federal banking agencies
prescribe accounting principles for regulatory reporting
purposes that are no less stringent than U.S. GAAP. Under
U.S. GAAP, custodial assets are generally not reported on the
bank's balance sheet provided that client assets held in
custody are properly segregated and held separately from the
bank's assets
(4) Has your agency directed banks and other financial
institutions within your jurisdiction to comply with the
terms of SAB 121 for the purposes of capital adequacy,
business plan change approvals, reporting and other
supervisory matters? If not, do you plan to do so?
The OCC worked with the other members of the Federal
Financial Institutions Examination Council to provide
regulatory reporting instructions to banks that provide for
each bank to determine whether it is appropriate to apply SAB
121 for financial reporting purposes. If a bank determines
that it is appropriate to follow SAB for financial reporting
purposes, the bank should also prepare its Consolidated
Reports of Condition and Income in the same manner.
(5) Does SAB 121 conflict with your agency's input
regarding the Basel Committee on Bank Supervision's
Prudential Treatment for Crypto Asset exposures, in so far as
the definition of ``digital asset'' under SAB 121 also
encompasses Group 1a, Group 1b, and Group 2 digital assets
under the Prudential Treatment framework?
The Basel Committee on Banking Supervision (BCBS) defines
cryptoassets as ``private digital assets that depend on
cryptography and distributed ledger technologies (DLT) or
similar technologies. Digital assets are a digital
representation of value, which can be used for payment or
investment purposes or to access a good or service.''
While the final BCBS cryptoasset standard applies different
capital treatments to Group 1 and Group 2 cryptoasset
exposures, the standard states that custodial service
activities are not considered ``exposures'' for the purposes
of the standard.

[[Page H2958]]

(6) Do you agree that the capital charge for banks, credit
unions, and other financial institutions under SAB 121 is
prohibitive?
The OCC expects banks to hold capital commensurate with the
nature and extent of the risks of their activities) For
national trust banks, OCC Bulletin 2007-21, ``Supervision of
National Trust Banks: Revised Guidance: Capital and
Liquidity,''provides that the minimum capital is informed by
analysis of quantitative and qualitative factors including,
but not limited to, financial projections, fixed and variable
expenses, the nature of fiduciary products and services being
proposed, and discussions with organizers.
(7) Do you 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 OCC will continue to monitor this issue and work to
ensure that national banks and federal savings associations
operate in a safe and sound manner, provide fair access to
financial services, treat customers fairly, and comply with
applicable laws and regulations, including consumer
protection laws.
If you have any questions or need additional information.
please do not hesitate to contact me or Carrie Moore,
Director, Public Affairs and Congressional Relations.
Sincerely,
Michael J. Hsu,
Acting Comptroller of the Currency.

Mr. BARR. Mr. Speaker, I also include in the Record a letter dated
March 16, 2023, sent by NCUA Chairman Harper in response to Chairman
McHenry's and Senator Lummis' March 2, 2023, letter.

National Credit

Union Administration,

Alexandria, VA, March 16, 2023.
Hon. Patrick McHenry,
Chairman, U.S. House Committee on Financial Services, U.S.
House of Representatives, Washington, DC.
Dear Chairman McHenry: Thank you for contacting the
National Credit Union Administration about the implementation
of Staff Accounting Bulletin 121. The increase in consumers
and businesses using digital assets, including
cryptocurrency, has impacted the financial services industry,
which includes both credit unions and banks. It is therefore
important to develop a balanced policy approach to address
emerging risks to the safety and soundness of federally
insured credit unions.
Your letter requests responses to several questions, which
reflect the NCUA's supervisory role over federally insured
credit unions. Our responses follow.
(1) Was your agency contacted by the SEC prior to the
issuance of SAB 121? If so, please identify the staff members
consulted by the SEC and provide copies of written feedback,
if any, provided to SEC staff.
The NCUA was not contacted.
(2) Has the SEC indicated that it will modify or withdraw
SAB 121 in light of widespread comments that the Bulletin is
flawed?
The NCUA is not aware of the SEC's intent to modify or
withdraw SAB 121.
(3) What are the legal and supervisory reasons off-balance
sheet treatment of custodial assets has historically been the
norm for banks and credit unions?
The off-balance sheet treatment of custodial assets is
rooted in generally accepted accounting principles, or GAAP
for short. The GAAP standard evolved from the concept of the
principal agent relationship, where the reporting of an asset
belonged to the entity that controlled the asset and
ownership rights were not passed to the custodian. As the
custodian did not have ownership rights--that is, the ability
to buy, sell, or leverage the asset--the custodian did not
report those types of assets in its financial statements. The
concept is codified in the Accounting Standards Codification
Topic 860 Transfers and Servicing, where ``transfers of the
custody of financial assets for safekeeping'' is excluded
from accounting for transfers and servicing of financial
assets.
(4) Has your agency directed banks and other financial
institutions within your jurisdiction to comply with the
terms of SAB 121 for the purposes of capital adequacy,
business plan change approvals, reporting and other
supervisory matters? if not, do you plan to do so?
The NCUA has not directed credit unions to comply with SAB
121 for any purpose. SAB 121 is a requirement of public
registrants and does not apply to credit unions, which are
cooperatively owned by their members.
(5) Does SAB 121 conflict with your agency's input
regarding the Basel Committee on Bank Supervision's
Prudential Treatment for Crypto Asset exposures, in so far as
the definition of ``digital asset'' under SAB 121 also
encompasses Group 1a, Group 1b, and Group 2 digital assets
under the Prudential Treatment framework?
The NCUA is neither a member of the Basel Committee nor
does it provide input on Bank Supervision's Prudential
Treatment for Crypto Asset exposures.
(6) Do you agree that the capital charge for banks, credit
unions, and other financial institutions under SAB 121 is
prohibitive?
If SAB 121 is eventually applied to nonpublic entities, it
will have implications for assessing the adequacy of an
insured credit union's net worth. If a credit union functions
as a digital asset custodian and is required to reflect the
digital assets held in custody on its balance sheet, the
credit union's net worth ratio would be negatively impacted
as the institution's assets would increase without a
commensurate increase in the net worth.
(7) Do you 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?
Prior to the release of SAB 121, the NCUA issued a Letter
to Credit Unions on Relationships with Third Parties that
Provide Services to Digital Assets. As stated in that letter,
the NCUA would not take exception to credit unions partnering
with third parties to make digital asset services available
to members. That letter also outlines the NCUA's expectations
that credit unions conduct adequate due diligence and ensure
compliance with all applicable laws and regulations when
engaging in any such activity. The NCUA is not able to
determine the impact of adopting SAB 121 at publicly traded
financial institutions that offer custody services of digital
assets and cannot make a broad determination of the impact on
consumer protection.
Thank you for raising this issue with the NCUA. If you have
additional questions, please feel free to contact me or have
your staff contact Elizabeth Eurgubian in our Office of
External Affairs and Communications.
Sincerely,
Todd M. Harper,
Chairman.

Ms. WATERS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, this bill has been opposed by the Biden administration.
Further, this bill is opposed by the following organizations: Americans
for Financial Reform, Better Markets, Public Citizen, Consumer
Federation of America, United States Public Interest Research Group;
New Jersey Citizen Action, Demand Progress, Institute for Agriculture
and Trade Policy, Texas Appleseed, 20/20 Vision, and Bank of New York
Mellon.
Mr. Speaker, I reserve the balance of my time.
Mr. McHENRY. Mr. Speaker, I yield 2 minutes to the gentleman from
Utah (Mr. Curtis).
Mr. CURTIS. Mr. Speaker, I rise today in favor of H.J. Res. 109 which
would repeal the SEC's unnecessary regulations on cryptocurrency and
the banking industry.
The SEC and its chairman, Gary Gensler, have repeatedly overstepped
their authority and targeted cryptocurrencies.
The SEC's latest unnecessary regulation was implemented outside of
the regular rulemaking process and bypassed established procedures, and
it shows.
This rule will limit banks' ability to offer digital assets as part
of their custodial services. This makes it more challenging for
Americans to safely engage with digital assets under the advisement of
their local banks who are able to accurately inform them of risks of
investments.
Crypto is a legitimate market used by millions of Americans. Hundreds
of thousands of those are in my district. Unfortunately, today they
have been referred to as ``criminals and drug dealers,'' and I take
offense to that.
We should be giving investors opportunities to take part in
cryptocurrencies, not putting up artificial barriers.
Mr. Speaker, I urge my colleagues to support this resolution and
repeal the regulation.
Ms. WATERS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, Republicans have echoed calls from the crypto industry
saying that legislation is needed to provide clarification on how
securities laws apply to them, but their actions reveal their true
motivation.
They don't want clarity; they want broad exemption from securities
laws.
Let's look at their actions to date. The first crypto-related bill
that Republicans marked up was the FIT 21 Act which they claimed was
responsive to the need for clarity on crypto.
The only thing clear about this highly convoluted bill is that it
would provide the crypto industry with broad exemptions from current
securities.
Mr. Speaker, I reserve the balance of my time.

{time} 1300

Mr. McHENRY. Mr. Speaker, may I inquire as to how much time is
remaining.
The SPEAKER pro tempore. The gentleman from North Carolina has 14
minutes remaining. The gentlewoman

[[Page H2959]]

from California has 9\1/2\ minutes remaining.
Mr. McHENRY. Mr. Speaker, I yield 3 minutes to the gentleman from
Arkansas (Mr. Hill), my friend and chair of the Digital Assets
Subcommittee and the vice-chair of the Financial Services Committee.
Mr. HILL. Mr. Speaker, I thank Chairman McHenry and the gentleman
from Nebraska (Mr. Flood) for this excellent work in this Congressional
Review Act resolution to roll back the SEC's failure in their Staff
Accounting Bulletin 121.
It would reshape the business of custody in this country. This is not
just about crypto. This is a sweeping rule that the SEC has implemented
without following the Administrative Procedures Act. The GAO says it is
a rule. Well, if it is a rule, it needs to go through the
Administrative Procedures Act and have a comment period and get people
involved because, as Ranking Member Waters noted, they did not consult
with the banking regulators, who have the primary role of supervising
custody in this country.
A custodian is someone who holds your assets for you, whether it is
shares of a stock or acres of forest land or a rental house or 10
bitcoin. Holding reserves against the assets in custody is not standard
financial services practice.
This staff accounting bulletin is misguided. It requires that money
be set aside for that category of assets of digital assets in custody.
It is part of a broader attack by the Biden administration to treat
digital assets differently from all other assets.
That doesn't make any sense to House Republicans. Under Mr. McHenry's
leadership and Mr. Thompson's leadership of the Ag Committee, we have a
fit-for-purpose approach that, in fact, directs the SEC and the CFTC
how to handle digital assets.
Unfortunately, this accounting bulletin is in the wrong direction.
That is why we have the Congressional Review Act. That is why we are
using Article I authority under the Constitution to say this is the
wrong direction and that we will all come to this House floor and say
it should be repealed and sent back.
Mr. Speaker, I would remind my friends on the other side of the
aisle, senior Biden official Vice Chairman Barr of the fed, Acting
Comptroller Hsu all testified before our committee that they were not
consulted by the SEC about this staff accounting bulletin. It is a
significant change. It is a rule. It should have gone through the
Administrative Procedures Act and be out for public comment.
Mr. Speaker, that is why I thank the gentleman from Nebraska (Mr.
Flood) for leading the charge on this important resolution, and I urge
adoption.
Ms. WATERS. Mr. Speaker, the industry, the custody industry, the big
banks that hold these crypto assets simply asked for a little
correction, a little clarity, a little information.
The Republicans are taking advantage of this, and this is the first
crypto bill that Republicans are bringing to the floor today, and it
would do what the majority always attempts to do, and this would
actually reverse SEC guidance that provides clarity on accounting
standards specifically for crypto assets. Not only that, but it would
undermine the SEC's ability to provide clarity on crypto in the future.
That is why the administration sees this bill for what it is and has
advised us that they would veto it.
Mr. Speaker, I reserve the balance of my time.
Mr. McHENRY. Mr. Speaker, I yield 3 minutes to the gentleman from
Ohio (Mr. Davidson), the chair of the Housing Subcommittee, the vice
chair of the Digital Assets Subcommittee, and a longtime leader in
digital innovation and digital assets.
Mr. DAVIDSON. Mr. Speaker, I thank the chairman for yielding time.
Mr. Speaker, this accounting bulletin has proven to be a barrier to
publicly traded banks having an ability to meaningfully engage in
distributed ledger products due to their overly broad definition of a
crypto asset. SAB 121 makes no distinction between asset types in use
cases, but, instead, generally states that crypto assets pose certain
technological, legal, and regulatory risks, requiring special on-
balance-sheet treatment.
All other assets, if you want to make a deposit at a bank, they are
glad to hold custody of the assets, but somehow these assets qualify
for special treatment.
Normally, if there was on-balance-sheet treatment, it would also just
be a clean entry. There wouldn't be a mark to mark it that would
require not just a balance sheet treatment that would be appropriate
for a custody of a certain kind of asset, but you would have income
statement flow throughs and all kinds of other risks.
Why would a bank need to cover extra risk up to 100 percent of the
deposit of an asset simply to take custody of the asset? This is a
special treatment that applies just to these assets, so applying on-
balance-sheet treatment for crypto assets wrongly subjects customer
assets to creditors' claims in the event there was a failure of a
custodial institution.
In a traditional bankruptcy, assets are accounted for on balance
sheet and are subject to creditor claims. Conversely, assets held in
custody for customers are accounted for off balance sheet and, thus,
are protected from creditor claims in bankruptcy because they remain
the assets of the company.
We would see this distinction in a company like Fidelity, where the
assets are off balance sheet, versus a company like Silicon Valley Bank
when they went bankrupt. The depositors were literally at risk. Why
would we change the standard with this out-of-jurisdiction rulemaking
by the SEC?
Requiring custody crypto assets to be accounted for on balance sheets
risks losing the bankruptcy protections of custodial services. This is
an important distinction from the treatment for a broker-dealer that
would be subject to a different form of bankruptcy under the Securities
Investor Protection Act. Distributor ledger technology does not change
the underlying nature of risk of traditional assets, nor do they
present risks that SAB 121 purports to address.
Mr. Speaker, I include in the Record three letters: A letter dated
August 23, 2023, cosigned by Chairman McHenry and Representative Hill,
sent to the Comptroller General at the Government Accountability
Office, urging GAO to complete its assessment on whether the
Congressional Review Act applies to SAB 121; a letter dated February
14, 2024, cosigned by the Bank Policy Institute, the American Bankers
Association, the Financial Services Forum, and the Securities Industry
and Financial Markets Association, sent to the SEC requesting a meeting
with the SEC Chairman, Gary Gensler, urging him to reconsider SAB 121;
and, lastly, a bipartisan, bicameral letter dated November 15, 2023,
cosigned by five Representatives and two Senators, sent to the Federal
Reserve, the OCC, the FDIC, NCUA, urging the agencies to withhold
enforcement of SAB 121 in light of GAO's decision.

House of Representatives,

Committee on Financial Services,

Washington, DC, August 23, 2023.
Re SEC Staff Accounting Bulletin No. 121 and the
Congressional Review Act

Hon. Gene Dodaro,
Comptroller General of the United States Government
Accountability Office, Washington, DC.
Dear Comptroller Dodaro: We write to inquire about the
status of the Government Accountability Office (GAO)'s
decision regarding the applicability of the Congressional
Review Act (CRA) to the Securities and Exchange Commission's
(SEC) Staff Accounting Bulletin No. 121 (SAB 121). We are
concerned that SAB 121 is not guidance but rather should be
considered a major action undertaken by the SEC. This letter
underscores the request by Senator Lummis expressing her
shared concern about the effect of SAB 121. To date, GAO has
not rendered a decision.
To underscore Senator Lummis' position, SAB 121 should be
construed as a rule for purposes of the CRA. SAB 121 is not
an interpretive rule. It is not a general statement of
policy. Rather SAB 121 is a major policy change that
fundamentally impacts the way customer assets under custody
are treated for balance sheet purposes. The Bulletin
significantly impacts a number of entities within the SEC's
purview but also state and nationally chartered banks and
trust companies.
Separately, it is important to note that Congress continues
to make progress on legislation establishing a regulatory
framework to provide certainty for the digital asset
ecosystem. The Committee's work to report out legislation
governing both the issuance and use of payment stablecoins as
well as the regulation of digital asset intermediaries is
consistent with the recommendations made by GAO this past
June. This legislative work should not be subverted by
unelected bureaucrats through opaque and unaccountable
processes such as SAB 121.

[[Page H2960]]

We encourage you to protect the prerogatives of the
legislative branch by determining SAB 121 as a major rule and
subject to the CRA. We appreciate your attention to this
matter.
Sincerely,
Patrick McHenry,
Chairman, Committee on Financial Services.
French Hill,
Chairman, Subcommittee on Digital Assets, Financial
Technology, and Inclusion.
____

February 14, 2024.
Hon. Gary Gensler,
Chair, U.S. Securities and Exchange Commission, Washington,
DC.
Dear Chair Gensler: The Bank Policy Institute (``BPI''),
the American Bankers Association (``ABA''), the Financial
Services Forum (``the Forum''), and the Securities Industry
and Financial Markets Association (``SIFMA'') (collectively,
the ``Associations'' write to request that the Securities and
Exchange Commission (``Commission'') consider targeted
modifications to Staff Accounting Bulletin No. 121 (``SAB
121'') to address recent policy developments and the
challenges that SAB 121 has posed for U.S. banking
organizations since it was issued on March 31, 2022.
As the two-year anniversary of the issuance of SAB 121
approaches, the Associations believe now would be an
appropriate time to examine and discuss the implications of
SAB 121 for regulated banking organizations. There have been
several relevant developments during this two year period,
including the GAO report issued in October, approval of
certain Spot Bitcoin ETPs, and the SEC's proposed rule on
Safeguarding Advisory Client Assets that would cover the
custody of digital assets if finalized as proposed. The
Associations believe that SAB 121 can be modified to mitigate
the specific challenges identified herein without undermining
the stated policy objectives of the Commission to enhance the
information received by investors and other users of
financial statements.
The Associations are happy to continue to serve as a
resource and work collaboratively with the Commission to
provide recommendations that would ensure that investors are
provided the requisite disclosures while allowing responsible
innovation to occur. The Associations and Commission share
the common goals of ensuring the highest levels of investor
protection and implementing policies that advance principles
of market integrity and financial stability.
We believe the recommendations set forth in this letter are
consistent with those principles and would remove unintended
barriers for well-regulated U.S. banking organizations to
engage in certain activities. Below we describe the drivers
behind this request and suggest targeted modifications to SAB
121.

I. Background

Since SAB 121 was issued in 2022, the Associations have
articulated their concerns regarding the Bulletin to the
Commission both in writing and in meetings with Commission
staff. The foremost concern identified and discussed is how
the on-balance sheet requirement of SAB 121 negatively
impacts U.S. banking organizations and investors due to the
associated prudential implications. The Associations have
underscored that on-balance sheet treatment will preclude
highly regulated banking organizations from providing a
custodial solution for digital assets at scale. Moreover, the
Associations have highlighted that the on-balance sheet
requirement, coupled with the overly-broad definition of
``crypto-asset'' in SAB 121, will have a chilling effect on
banking organizations' ability to develop responsible use
cases for distributed ledger technology (DLT) more broadly.
U.S. banking organizations' experience over the past two
years has confirmed that SAB 121 has curbed the ability of
the Associations' members to develop and bring to market at
scale certain digital asset products and services. In
comparison, in-scope entities of SAB 121 other than U.S.
banking organizations have not suffered the same effects. For
example, digital asset custodial services are currently
offered by various non-banking organizations, thereby keeping
activity outside the prudential perimeter and avoiding the
necessary oversight by regulators. Indeed, if regulated
banking organizations are effectively precluded from
providing digital asset safeguarding services at scale,
investors and customers, and ultimately the financial system,
will be worse off, with the market limited to custody
providers that do not afford their customers the legal and
supervisory protections provided by federally-regulated
banking organizations. The Associations continue to urge the
Commission to work with industry to adopt solutions that
could mitigate the described challenges.

II. Concrete Examples of the Impact of SAB 121 on U.S. Banking
Organizations

The Associations highlight two specific examples of the
negative impact of SAB 121 on banking organizations,
investors, and the financial ecosystem:
(1) Spot Bitcoin ETPs: The Commission recently approved 11
Spot Bitcoin ETPs, allowing investors access to this asset
class through a regulated product. However, notably absent
from those approved products are banking organizations
serving as the asset custodian, a role they regularly play
for most other ETPs. These ETPs have already experienced
billions of dollars in inflows, but it is practically
impossible for banks to serve as custodian for those ETPs at
scale due to the Tier 1 capital ratio and other reserve and
capital requirements that result from SAB 121. This raises
important questions about the safety and stability of this
ecosystem. We believe that this result could raise
concentration risk, as one nonbank entity now serves as the
custodian for the majority of these ETPs. That risk can be
mitigated if prudentially regulated banking organizations
have the same ability to provide custodial services for
Commission regulated ETPs as qualified nonbank asset
custodians. SAB 121 does not appear to contemplate this type
of concentration risk, in part perhaps because Spot Bitcoin
ETPs or similar products were not an approved product at the
time SAB 121 was issued.
(2) Use of DLT to record traditional financial assets:
Banking organizations are increasingly exploring the use of
DLT to record traditional financial assets, such as bonds.
The use of DLT has the potential to expedite and automate
payment, clearing, reconciliation and settlement services,
and multiple central banks outside the United States are
partnering with banks to explore the adoption of DLT.
However, SAB 121 has proven to be a barrier to banking
organizations' ability to meaningfully engage in DLT-based
projects due to the breadth of the definition of ``crypto-
asset'' in SAB 121: ``a digital asset that is issued and/or
transferred using distributed ledger or blockchain technology
using cryptographic techniques.'' Under this definition, a
traditional financial asset issued or transferred using DLT
could be considered a ``crypto asset'' and thus within scope
of SAB 121, regardless of the applicable risks. SAB 121 makes
no distinction between asset types and use cases, but instead
generally states that crypto-assets pose certain
technological, legal, and regulatory risks requiring on-
balance sheet treatment. However, there are significant
differences between a cryptocurrency like Bitcoin that exists
on a public, permissionless network versus a traditional
financial instrument that is recorded on a blockchain network
where access is controlled and transactions can be cancelled,
corrected, or amended. The past two years have underscored
these differences, as the turmoil in the crypto market has
been wholly unrelated to banks' use of permissioned DLT. DLT
does not change the underlying nature or risks of traditional
assets, nor do they present the risks SAB 121 purports to
address, and thus SAB 121's application to those assets
should be reconsidered. Clear indication from the Commission
that the use of DLT to record or transfer traditional
financial assets is consistently outside the scope of SAB 121
would alleviate associated challenges.

III. Proposed Modifications and Clarifications

The Associations request that the Commission consider the
following targeted modifications to SAB 121 to address the
above concerns:
Narrow the definition of ``crypto-assets'' to clarify and
confirm the exclusion of certain asset types and use cases.
SAB 121 is premised on the risks posed exclusively by
cryptocurrencies, and traditional financial assets recorded
or transferred using blockchain networks should be excluded
because they do not present the same risks as
cryptocurrencies; the use of DLT does not change the
underlying nature or risk of traditional assets. Moreover,
certain exclusions for products wherein the underlying
activity relates to the offering of a Commission-approved
product should be clarified.
Exempt banking organizations from on-balance sheet
treatment but maintain the disclosure requirements: As
described previously, SAB 121 answers three questions, and
the Associations' and its members' are primarily concerned
with the first question: how an entity should account for its
obligations to safeguard crypto-assets (the on-balance sheet
treatment). We do not object to the requirements imposed in
the answer to the second question (disclosures in financial
statements). Exempting banking organizations from the on-
balance sheet treatment but requiring them to make certain
disclosures about their digital activity would mitigate the
concerns raised by banking organizations without undermining
the goal of SAB 121 to promote disclosures to investors.
Balance sheet disclosure may be appropriate where the
controls are not adequate to protect investors from the risk
of custodied assets, which is not the case for banking
organizations that are subject to robust oversight from the
federal banking agencies. The required disclosures in the
answer to the second question are broad and may include
disclosures in the description of business, risk factors, and
management's discussion and analysis of financial condition
and results of operation, and such information will still
``enhance the information received by investors and other
users of financial statements about these risks, thereby
assisting them in making investment and other capital
allocation decisions.''

IV. Conclusion

The Associations and their members appreciate your
attention to the issues raised in this letter. Given the
upcoming two-year anniversary of the issuance of SAB 121,
certain

[[Page H2961]]

policy developments, the experience of U.S. banking
organizations, and the evolution in technology since the
guidance was first issued, we believe it is an appropriate
time to reflect on the intended goals of SAB 121. We request
a meeting with you and Commission staff to discuss the issues
and proposed modifications set forth above.
We appreciate the Commission's attention to this important
topic and look forward to engaging with you further. If you
have any questions, please contact Paige Pidano Paridon.
Respectfully submitted,
Bank Policy Institute,
American Bankers Association,
Financial Services Forum,
Securities Industry and Financial Markets Association.

____
Congress of the United States,

Washington, DC, November 15, 2023.
Hon. Martin Gruenberg,
Chairman of the Board, Federal Deposit Insurance Commission,
Washington, DC.
Hon. Michael Barr,
Vice Chair for Supervision, Board of Governors of the Federal
Reserve System, Washington, DC.
Hon. Michael Hsu,
Acting Comptroller of the Currency, Office of the Comptroller
of the Currency, Washington, DC.
Hon. Todd Harper,
Chairman of the Board, National Credit Union Administration,
Alexandria, VA.
Dear Vice Chair Barr, Chairman Gruenberg, Chairman Harper,
and Acting Comptroller Hsu: We write regarding Securities and
Exchange Commission (SEC) Staff Accounting Bulletin 121
(``SAB 121'') published on April 11, 2022.
Last month, the Government Accountability Office (GAO)
issued a legal decision that SAB 121 is a rule for purposes
of the Congressional Review Act. SAB 121 was issued without
consultation with any of your respective agencies and would
require custodians to recognize a liability and a
corresponding offset on their balance sheets, measured at the
fair value of the customer custodial digital assets. This
accounting approach, which deviates from established
accounting standards, would not accurately reflect the
underlying legal and economic obligations of the custodian,
and places consumers at greater risk of loss.
In its decision, GAO stated that ``it is reasonable to
believe that companies may change their behavior to comply
with the staff interpretations found in the Bulletin'' due to
the SEC's responsibility and authority in monitoring public
disclosures and pursuing enforcement actions against
noncompliant entities.
SAB 121 meets the definition of a rule under the
Administrative Procedure Act (APA), and was never submitted
to Congress or the GAO, nor was it subsequently published in
the Congressional Record consistent with the requirements of
the Congressional Review Act. Given that the SEC failed to
meet these obligations, SAB 121 should have no legal effect
and the Federal banking agencies and National Credit Union
Administration should not require banks, credit unions and
other financial institutions that provide custody services
for digital assets to comply. This means that such entities
need not recognize a liability and a corresponding asset
offset on their balance sheets.
Enforcing this noncompliant rule would set a concerning
precedent that would facilitate regulatory gamesmanship to
circumvent the APA, effectively allowing the SEC to have
regulatory authority over institutions which Congress did not
authorize.
We therefore ask you to clarify, through guidance or other
action, that SAB 121 is not enforceable in light of the
recent GAO determination. Thank you for your attention to
this matter.
Sincerely,
Patrick McHenry,
Member of Congress.
French Hill,
Member of Congress.
Ritchie Torres,
Member of Congress.
Wiley Nickel,
Member of Congress.
Cynthia M. Lummis,
United States Senator.
Kirsten Gillibrand,
United States Senator.
Mike Flood,
Member of Congress.

Ms. WATERS. Mr. Speaker, the sponsor of this bill, Mr. Flood, has
asked what the alternative to this CRA resolution would be, and that
answer is very simple: Draft a bill that narrowly addresses the current
question about how this guidance applies to banks. The use of a CRA is
dangerous and reckless.
Mr. Speaker, I reserve the balance of my time.
Mr. McHENRY. Mr. Speaker, my friend says dangerous and reckless.
Well, Democrats used the Congressional Review Act process just like
Republicans have used the Congressional Review Act process. This is not
reckless or dangerous. It is law, and we are trying to be a check and
balance on overreach of the administration.
Mr. Speaker, I yield 2 minutes to the gentleman from Wisconsin (Mr.
Fitzgerald), an esteemed member of the Financial Services Committee and
Judiciary Committee.
Mr. FITZGERALD. Mr. Speaker, I thank the chairman for yielding.
Mr. Speaker, I rise today in strong support of H.J. Res. 109. I don't
want to be redundant on some of these points, but the SEC's Staff
Accounting Bulletin 121 is a radical departure from how custodians
account for all other assets. By requiring custodians to treat digital
assets as both an asset and a liability on their balance sheets, SAB
121 makes it nearly impossible for banks to provide custody services
for digital assets due to the prudential requirements that it would
trigger.
Innovations like the tokenization of assets have the potential to
dramatically improve our financial infrastructure, and tokenization
will allow new innovations and traditionally illiquid assets to become
available to more people more efficiently, like commercial bank
deposits, government corporate bonds, money market fund shares, real
estate, gold, and other commodities.
However, for tokenization to take hold, it is important for regulated
financial institutions to be custodians in order to identify the
entitlement holder and to mitigate any single point of failure in the
record of the ownership.
Mr. Speaker, this misguided action from the SEC should be struck
down, and I urge my colleagues to vote ``yes'' for this resolution.
Ms. WATERS. Mr. Speaker, I reserve the balance of my time.
Mr. McHENRY. Mr. Speaker, I yield 3 minutes to the gentleman from
North Carolina (Mr. Nickel), my good friend and colleague, and a great
leader in digital assets.
Mr. NICKEL. Mr. Speaker, I rise in support of the bipartisan
resolution I am leading with my colleague across the aisle, Congressman
Mike Flood.
Mr. Speaker, our Congressional Review Act resolution to disapprove of
the SEC's Staff Accounting Bulletin 121 protects consumers, reinforces
Congress' role in the rulemaking process, and pushes back on the SEC's
hostility toward digital assets.
Mr. Speaker, SAB 121 makes the digital assets industry less safe for
consumers. It prevents well-regulated banks from safeguarding digital
assets that are owned by their clients. SAB 121 requires banks to place
custody of digital assets on their balance sheets, contrary to how
traditional assets are treated. This makes it nearly impossible for a
bank to provide custody of digital assets at scale, leaving investors
to rely on riskier, unregulated options.
Mr. Speaker, whether you love crypto or you hate it, you should want
the most heavily supervised financial institutions who are experts at
custodial banking to safeguard digital assets. We are also seeing this
issue with SAB 121 play out in real time, the SEC's recent approval of
spot bitcoin ETPs, which I pushed for, allows retail investors access
to this asset class through a regulated product. However, most bitcoin
ETPs are held by the same nonbank custodian. Notably, banks aren't
serving as custodians for any of these products as they would with a
traditional ETP. This could pose a risk to the safety and soundness of
the financial system, a concentration of risk issue, for sure.
To make matters worse, Gary Gensler and the SEC deliberately
sidestepped the customary regulatory process, amounting to an obvious
overstep of the agency's authority.
Last October, the Government Accountability Office concluded that the
SEC breached statutory rulemaking requirements by issuing SAB 121 as
guidance rather than a rule, avoiding the notice and comment period.
SABs are meant to serve as tools to interpret existing policies, not
create brand-new policy like SAB 121.
Additionally, the SEC issued the rule without conferring with banking
regulators, which is unacceptable given the SEC's lack of prudential
authority over banking institutions. It is time for Congress to take
action and conduct oversight of the SEC's missteps. We shouldn't have
to resort to using a CRA to fix this issue, and Gary Gensler could re-
issue this accounting bulletin

[[Page H2962]]

and work with stakeholders to find a solution, but, unfortunately, this
is the only tool that we have left.

As with previously successful CRAs, the SEC will be able to re-issue
its rule as long as it has made changes responding to statements made
by Members in the Congressional Record.
Mr. Speaker, I ask my colleagues to support our bipartisan CRA of SAB
121, which will protect investors and the financial system, encourage
innovation, bolster American competitiveness, and restore Congress'
role in administrative rulemaking.
Ms. WATERS. Mr. Speaker, Mr. Davidson entered a letter into the
Record from several bank trades. What he did not mention was that the
banks only asked for target modifications when they wrote about this
legislation. In fact, in that letter, they supported the transparency
requirements this resolution would repeal.
Mr. Speaker, I reserve the balance of my time.
Mr. McHENRY. Mr. Speaker, may I inquire as to how much time is
remaining.
The SPEAKER pro tempore. The gentleman has 3\3/4\ minutes remaining.
The gentlewoman has 7\1/2\ minutes remaining.
Mr. McHENRY. Mr. Speaker, I am prepared to close, and I reserve the
balance of my time.
Ms. WATERS. Mr. Speaker, I yield myself the balance of my time to
close.
Mr. Speaker, I would urge my colleagues to see this bill for what it
is. It is a giveaway to one powerful special interest group in an
effort to weaken the SEC, a crucial agency that protects investors and
the functioning of our capital markets. This is the agency that is
working to protect the retirement savings of millions of Americans.
This is the agency that is crucial to making our capital markets the
envy of the world. This is the agency at the forefront of ensuring that
innovation, like in crypto, is done responsibly and in accordance with
existing security laws. We simply cannot afford to weaken the SEC.

{time} 1315

Moreover, this resolution harms investors by eliminating much-needed
transparency on volatile crypto assets, making it harder for them to
make informed investment decisions. It also harms crypto users because
transparency also deters fraud and other mismanagement of assets that
can lead to devastating losses for consumers.
Additionally, the resolution increases the likelihood of market
volatility because a lack of transparency can result in more unexpected
failures of crypto-related companies.
Finally, this resolution harms all public companies who benefit from
the SEC's practice of providing timely guidance through Staff
Accounting Bulletins.
If the Republicans would like to address the issue raised by large
custody banks, they should do that, but there is no need to cause
broader harm to the SEC and all of the people and companies that rely
on it to maintain safety and stability.
Mr. Speaker, the President of the United States would not be giving
us this information this early about vetoing unless they saw this as a
serious issue that must be dealt with right here on the floor of the
House of Representatives.
Mr. Speaker, I yield back the balance of my time.
Mr. McHENRY. Mr. Speaker, I include in the Record a May 7, 2024,
letter from the American Bankers Association, Bank Policy Institute,
the Financial Services Forum, and the Securities Industry and Financial
Markets Association supporting H.J. Res. 109.
May 7, 2024.
Re Providing for Congressional disapproval under chapter 8 of
title 5, United States Code, of the rule submitted by the
Securities and Exchange Commission relating to ``Staff
Accounting Bulletin No. 121'' (H.J. Res. 109)

Hon. Mike Johnson,
Speaker, House of Representatives,
Washington, DC.
Hon. Hakeem Jeffries,
Minority Leader, House of Representatives,
Washington, DC.
Dear Speaker Johnson and Minority Leader Jeffries: The
American Bankers Association, Bank Policy Institute,
Financial Services Forum, and Securities Industry and
Financial Markets Association (Associations) write to express
our support for H.J. Res. 109, the Congressional Review Act
resolution of disapproval for the Securities and Exchange
Commission's ``Staff Accounting Bulletin 121.'' H.J. Res. 109
was introduced by Reps. Mike Flood (R-NE) and Wiley Nickel
(D-NC) and favorably reported by a bipartisan vote from the
Financial Services Committee on February 29. The measure is
scheduled for consideration by the House this week.
In March 2022, the Securities and Exchange Commission's
(SEC) Office of the Chief Accountant released Staff
Accounting Bulletin (SAB) 121, without consulting the
prudential regulators or soliciting public comment, to
address perceived risks to publicly traded companies that
safeguard digital assets for their customers. Under SAB 121,
an entity responsible for safeguarding digital assets for
platform users must measure safeguarding assets and
obligations on its balance sheet at the fair value of the
related assets, which is a departure from accounting
standards and the historical practice of treating custodial
assets as off-balance sheet. As this effectively treats the
custodied assets as those owned by a bank, SAB 121
effectively precludes banks from offering digital asset
custody at scale since placing the value of client assets on
their balance sheets will impact certain capital, liquidity,
and other prudential requirements. Furthermore, SAB 121
undercuts the ability of banks to develop responsible use
cases for distributed ledger technology (DLT) and encumbers
regulated broker-dealers from custody services as a result of
the net capital rule (Rule 15c3-1), which treats the on-
balance sheet items as non-allowable assets.
On February 14, 2024, the Associations sent a joint letter
to the SEC noting that over the past two years SAB 121 has
curbed the ability of our member banks to develop and bring
to market at scale certain digital asset products and
services. This includes spot bitcoin exchange traded products
(recently approved by the Commission for investors) and the
use of DLT to record traditional financial assets (i.e.
tokenization).
SAB 121 represents a significant departure from
longstanding accounting treatment for custodial assets and
threatens the industry's ability to provide its customers
with safe and sound custody of digital assets. Other, non-
bank digital asset platforms subject to SAB 121 are not
required to meet the same capital, liquidity, or other
prudential standards as banks and therefore do not face the
economically prohibitive implications of SAB 121. Limiting
banks' ability to offer these services leaves customers with
few well-regulated, trusted options for safeguarding their
digital asset portfolios and ultimately exposes them to
increased risk.
The Associations respectfully request that Members of the
House vote in favor of H. J. Res. 109.
Sincerely,
American Bankers Association,
Bank Policy Institutec,
Financial Services Forum,
Securities Industry and Financial Markets Association.

Mr. McHENRY. Mr. Speaker, I yield myself the balance of my time.
Mr. Speaker, the administration's approach to digital assets doesn't
make a lot of sense.
The President has an executive order outlining work products that he
wants from agencies. On one hand, they say we want to bring digital
assets into regulated finance, and we need clear rules of the road.
On the other hand, the administration's appointees at the Securities
and Exchange Commission have done everything they can to undermine that
level of clarity, that is number one; number two, issuing guidance that
undermines whatever the current clarity is and diminishing that; number
three, thereby diminishing consumer protection.
It is a nonsensical approach. So the administration says they want to
veto this resolution. Yet they have a whole workstream the President
issued without any forcing mechanism and executive order asking for a
regulated stable coin, which we have passed out of the House Financial
Services Committee with bipartisan votes.
They have asked for a market regulation to give clarity of what is a
digital asset, and a means of exchange so American consumers can
participate in this innovation that is the basis of the new generation
of internet technology that the globe is using and America is behind.
I think it is important that we engage, as best we can, whether it is
with the stable coin bill that we passed out of committee--the market
regulation bill we passed out of committee--that it brings that clarity
the President's executive order asked for, and takes this first step to
provide consumer protection so that their financial assets are
protected.
If the firm goes bankrupt, they want to know they can get their asset
back. Passing this repeal is the first step in that process.

[[Page H2963]]

This is very important for consumer protection. If you support
consumer protection vote ``yes'' on this resolution. If you support
safety and soundness for financial institutions vote ``yes.'' If you
support reining in rogue regulators vote ``yes.'' This should be a wide
bipartisan vote and a statement that the House supports digital assets,
digital innovation, and thoughtful policymaking from our regulators and
regulated finance.
Mr. Speaker, I urge adoption of this resolution. I also thank my
colleagues on the Democrat side, Mr. Nickel, and on the Republican
side, Mr. Flood, for their thoughtful approach to policymaking, and
digital assets generally, but on developing this Congressional Review
Act proposal, in particular.
Mr. Speaker, I urge the adoption of the resolution, and I yield back
the balance of my time.
The SPEAKER pro tempore. All time for debate has expired.
Pursuant to House Resolution 1194, the previous question is ordered
on the joint resolution.
The question is on the engrossment and third reading of the joint
resolution.
The joint resolution was ordered to be engrossed and read a third
time, and was read the third time.
The SPEAKER pro tempore. The question is on passage of the joint
resolution.
The question was taken; and the Speaker pro tempore announced that
the ayes appeared to have it.
Mr. McHENRY. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX, further
proceedings on this question will be postponed.

____________________