President Biden’s SAB 121 Veto Survives US House Challenge: What’s Next For Crypto Regulation?
- The US House of Representatives failed to override President Joe Biden’s veto, maintaining the SAB 121 intact.
- Mike Flood and others continue to seek alternative methods to challenge SAB 121, aiming to facilitate digital financial growth by removing governmental barriers.
- Critics argue that SAB 121 hampers financial institutions’ ability to engage with crypto companies.
- Despite his veto, Biden’s administration aims to collaborate with Congress on regulations supporting the responsible growth of digital assets.
In May, US President Joe Biden vetoed a House Joint Resolution that sought to repeal the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121) , a contentious piece of SEC accounting guidance that required financial institutions holding digital assets such as cryptocurrencies to label them as liabilities on their balance sheets.
Critics argued that this directive hampered financial institutions’ ability to engage with crypto companies.
However, soon after their first legislative attempt to overturn SAB 121, Congress prepared for another intense battle with the Biden administration to override the veto. In a surprising turn of events, the US House of Representatives’ efforts fell short , leaving the SEC’s crypto accounting policy unchanged.
House Fails To Override Biden’s Veto
On July 11, 228 House members voted for HJ Res. 109 to end SAB 121, while 184 voted against the resolution, and 21 abstained. Despite the majority support for overturning SAB 121, the vote fell short of the required two-thirds majority to counter President Biden’s veto.
House Financial Services Committee Chairman Patrick McHenry criticized Biden’s veto, accusing the administration of prioritizing bureaucratic power over the interests of the American people.
Representative Mike Flood, who initially introduced the resolution, expressed his commitment to seeking alternative methods to end SAB 121, aiming to remove government barriers to digital financial growth. He argued before the House that SAB 121 is a poor regulation that unnecessarily restricts banks from digital asset custody and that the SEC has overstepped its authority in defining these policies.
SEC To Allow Banks To Avoid Reporting Customer Crypto Holdings?
The debate over the SEC’s crypto accounting policy nearly became moot this week, according to Rep. Maxine Waters (D-Calif.). She mentioned that the SEC has been negotiating with banking industry representatives about “targeted modifications” to the policy and “may be close to reaching an agreement.”
However, Waters noted that “Republicans are pushing ahead anyway with this blunt and overly broad approach,” which she argued would undermine the regulator.
The SEC has provided guidance allowing banks and brokerages to avoid reporting customers’ crypto holdings on their balance sheets if they offset the associated risks. This approach aims to address concerns about hacking and business failures without the controversial accounting requirements.
Banks consulting with SEC staff have received approval to bypass balance sheet reporting by ensuring customer assets are protected in case of bankruptcy and implementing internal safeguards.
This adjustment could broaden the options for American crypto holders by enabling more banks to offer crypto services without triggering additional capital requirements. Despite trade groups urging Congress to rescind the guidance, a recent House vote failed to override a presidential veto, keeping the measure in place.
Growing Opposition to SAB 121
More than 20% of Americans actively invest in cryptocurrency, necessitating investor-friendly regulation. The SAB 121 bill faces criticism from both private companies and banking sectors for restricting banks from offering crypto custody.
Eliminating this rule could enhance adoption and participation in the industry.
The Bank Policy Institute , American Bankers Association , and others have urged SEC Chairman Gary Gensler to modify SAB 121, arguing that preventing banks from offering crypto custody pushes investors towards public companies lacking regulatory oversight, thereby affecting asset safety and stability.
Conversely, some argue that SAB 121 is essential for clarity and security, addressing issues like taxation and market stability and providing higher stability for top cryptocurrencies like Bitcoin and Ethereum.
US House to Challenge SEC’s Crypto Rule, Seeking Two-Thirds Majority
After their first legislative attempt to overturn SAB 121, Congress is gearing up for another intense battle with the Biden administration to secure the support of both the House and the Senate to override the veto.
According to House Majority Leader Steve Scalise, the House is expected to vote on the resolution on Tuesday or Wednesday.
Congress needs a two-thirds majority in both chambers to succeed in this override. However, achieving this could be challenging, particularly as opinions on the SEC’s rule vary widely among legislators.
Previously, in May, the House voted 228-182 to overturn SAB 121, with support primarily from Republicans and 21 Democrats. Following this, the Senate passed the measure with a vote of 60 to 38, which included affirmative votes from several Democrats, such as Senate Majority Leader Chuck Schumer from New York.
Despite the formidable challenge, Alexander Grieve, a government affairs specialist at venture capital firm Paradigm, believes a 75% super majority is achievable .
In his post on X , Grieve expressed optimism about rallying a two-thirds vote to overturn the veto, noting it’s a steep hill to climb but not impossible given the bipartisan nature of the FIT vote.
The FIT21, a crypto market structure bill, was supported in the full House vote in May by a margin of 279-136, with 71 Democrats in favor.
Now, to succeed, the House needs 290 votes, while the Senate needs 66 votes. With 217 Republicans and 213 Democrats in the House and 49 Republicans and 47 Democrats in the Senate, the numbers are tight.
Even with the recent surge in enthusiasm for crypto, Republicans would need to convince over 99 Democrats to achieve their goal. The stakes are high, and the coming days will be crucial in determining the fate of SAB 121.
Biden’s Ratings Spiral
President Biden’s relationship with the crypto industry has hit a rough patch, particularly after his controversial veto to maintain SAB 121. Many prominent voices in the crypto industry have expressed their discontent with the current administration, including Crypto investor and entrepreneur Ryan Sean Adams, who criticized SAB 121 as “an anti-crypto rule implemented by Gensler’s SEC to prevent banks from holding crypto.”
Galaxy CEO Mike Novogratz has also expressed disappointment with President Biden’s decision, noting that it benefits Donald Trump, who is positioning himself as the pro-crypto candidate in the upcoming November presidential elections.
After Democrats in both the House and Senate, including Senate Majority Leader Chuck Schumer, voted in favor of repealing the SAB 121, President Biden appeared increasingly isolated within his own party.
“Right now, they’re kind of letting Trump own this issue,” former Biden advisor Moe Vela previously told CCN, commenting on the crypto regulation stance.
“The regulatory environment for crypto right now is in shambles. It’s practically non-existent,” he observed. However, Vela then cautioned against assuming that a Trump presidency would automatically resolve the issues facing the crypto sector.
President Biden’s stance on cryptocurrencies has been more ambiguous than that of Donald Trump, who has positioned himself strongly in favor of the industry. Nevertheless, according to Pantera Capital, Biden is gradually becoming more receptive to the crypto sector.
Despite Biden’s veto of overturning SAB 121, the White House is keen on collaborating with Congress to establish regulations that support the responsible growth of digital assets and payment innovations, reinforcing the US’s global financial leadership. Pantera also noted that Biden did not veto the more significant pro-crypto FIT21 Act, which passed the House in mid-May.
Congress Votes to Overturn SEC’s Crypto Custody Rule, Biden Veto Expected
The US Senate passed a measure in May to overturn a Securities and Exchange Commission (SEC) bulletin that sets accounting standards for firms holding cryptocurrencies.
The bill, which received a 60 to 38 vote with support from several Democrats, then headed to Biden’s desk, which vetoed it.
The House voted 228-182 in favor of repealing SEC Staff Accounting Bulletin 121 (SAB 121). However, this tally also fell short of the two-thirds majority required to override a presidential veto.
The measure also passed the Senate but was already then expected to face a veto from the president. A statement said Biden believed that restricting the SEC’s regulatory capacity over crypto assets would lead to significant financial instability and market uncertainty.
During the debates leading up to the vote, Senator Elizabeth Warren of Massachusetts, who opposed the measure, highlighted that cryptocurrencies carry unique risks.
She said:
“We have seen multiple hacks of crypto platforms. The unique risks of crypto can create liabilities that seriously impact a company’s financial condition. SAB 121 simply clarifies how companies should account for those risks in their financial disclosures. That’s all it’s doing.”
Congressional Challenge to SEC Crypto Regulation Signals Growing Support for Industry
The resolution to overturn the SEC’s crypto regulation saw bipartisan support, with a dozen Democrats joining the majority of Republicans, securing it well past the simple majority required for passage. Despite this support, the vote count was insufficient to make it veto-proof. Notably, Senate Majority Leader Chuck Schumer (D-NY) deviated from party leadership by opposing the SEC’s stance on crypto.
Senator Cynthia Lummis (R-Wyo.), a prominent advocate for the resolution in the Senate, criticized the bulletin as “a disaster” that failed to protect consumers. She said: “This is a win for financial innovation and a clear rebuke of the way the Biden administration and Chair Gary Gensler have treated crypto assets.”
The vote marked a historic moment because it was the first time both chambers of Congress have passed standalone crypto legislation.
Democratic Senator Kirsten Gillibrand said she supported the resolution. She claimed the rule enforced an unconventional accounting method.
Gillibrand said:
“The rule was issued without proper consultation with the respective regulatory agencies or Congress and without going thru a proper notice and comment period. More importantly, it imposes an accounting approach that deviates from established standards, forcing financial institutions to count their customers’ digital assets as their own. This will limit options for consumers and leave them with less, not more consumer protection in cases of bankruptcy.”
Urging SEC to Reconsider Crypto Rule Amidst Bipartisan Support
Wiley Nickel wrote to SEC Chairman Gary Gensler on Wednesday, May 15. In it, Nickel said he had tried to arrange a meeting to discuss the bulletin with Gensler’s office but had not received a reply.
He urged Gensler to withdraw SAB 121 to safeguard investors and the financial system, enhance American competitiveness, and honor Congress’s role in the rulemaking process. Nickel emphasized that withdrawing SAB 121 would allow custodial banking of digital assets. This, he argued, would represent a significant step towards a balanced regulatory approach to cryptocurrency.
Ron Hammond, the director of government relations at the Blockchain Association, said: “The threat of a presidential veto remains. We encourage the veto to be reconsidered, allowing this harmful, anti-crypto provision to be struck down.”
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