Providing for Congressional Disapproval of the Rule Submitted By the Securities and Exchange Commission Relating to ``Staff Accounting Bulletin No.

Floor Speech

Mr. Speaker, I rise in strong opposition to H.J. Res. 109, a Congressional Review Act resolution that would overturn accounting guidance for crypto 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

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 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.

BREAK IN TRANSCRIPT

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.

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.

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.
BREAK IN TRANSCRIPT

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.

BREAK IN TRANSCRIPT

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, 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, 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.

BREAK IN TRANSCRIPT

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.

BREAK IN TRANSCRIPT

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.
BREAK IN TRANSCRIPT

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 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.

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.

BREAK IN TRANSCRIPT

Source