SEC Commissioner Pierce Criticizes SAB 121 as ‘Odd’

• SEC Commissioner Hester Pierce has again criticized the SEC’s anti-crypto Staff Accounting Bulletin (SAB) 121 for excluding experienced players from managing cryptocurrencies.
• Pierce further described the agency’s guidance position on investments as very odd and lacking an orientation toward investor protection

SEC Commissioner Hester Pierce has again expressed her concerns about the SEC’s anti-crypto guidance, SAB (Staff Accounting Bulletin) 121. Pierce described the guidance this way: “We don’t want sophisticated players taking custody of crypto.”

According to the Commissioner, the SEC’s position that experienced players should not hold cryptocurrencies is a very strange position that is not aimed at investor protection.”

“I’m open to and excited about developments that allow more people to come in and participate in custody. Again, it has to be done in an orderly manner. I think the end goal is to have parties that have experience in other parts of the world get involved in crypto. That’s generally a good thing.” said Pierce.

However, she finds it unfortunate that the government is trying to “drive away players who would be interested in participating.” Pierce would like to see more participants take custody of crypto, which she believes would be a potentially positive development.

The Commission introduced the SAB 121 directive on March 31, 2022, with new requirements for financial institutions offering crypto custody services, automatically streamlining this service to certain traditional financial institutions under their supervision. In essence, many institutions that previously offered custody services for digital assets are being forced to abandon the service.

In addition, the Directive introduced stricter reporting criteria for crypto custodians, such as determining the fair value of client assets and recording a corresponding liability for themselves on the balance sheet per asset held. This strict risk reporting is intended to reflect the risks and responsibilities associated with holding such assets on behalf of clients.

However, the directive was not well-received by the crypto industry. Surprisingly, other players who would not normally side with the industry, such as Democratic lawmakers, confirmed the impracticality of the rule by joining their Republican colleagues in Congress’s effort to overturn the rule.

Unfortunately, after passing the House and Senate in a resounding fashion, President Biden vetoed the joint resolution. A subsequent attempt to override the veto also failed on the House floor.

Meanwhile, it appears that even the agency understands how overwhelming the directive’s requirements are for financial institutions. The agency has reportedly allowed several major banks to bypass liability reporting for crypto assets in their custody, provided they meet certain requirements that ensure that customers’ assets are safe in the event of bankruptcy or insolvency.

New legislation called “The Uniform Treatment of Custodial Assets Act” is already in the works to counter SAB 121’s requirements that restrict financial institutions from providing crypto custody services, according to Rep. Wiley Nickel, a co-sponsor of the House resolution to override the president’s veto. Lawmakers expect it to be a bipartisan bill that would allow banks to safely offer digital asset custody services.