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President Biden Vetoes Bill to Overturn SAB 121; Coinbase Files Closing Brief Calling for Rulemaking from the SEC

President Biden Vetoes Bill to Overturn SAB 121

What happened?

On May 31st, President Biden vetoed a resolution to overturn the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 121 (SAB 121) through an oversight mechanism called the Congressional Review Act (CRA). President Biden had earlier threatened to veto the bill if it reached his desk.

SEC staff issues “non-binding” accounting bulletins that explain their interpretation of Generally Accepted Accounting Principles (GAAP), which public companies use to report financials. Because SABs are usually guidance (as opposed to finalized rules), they are not typically subject to the process of public notice and comment. However, because they represent the views of the staff that oversees public companies’ financial reporting, SABs, in practice, function as additional rules regulated entities must follow to avoid enforcement problems.

SAB 121 was issued in May of 2022 and dealt primarily with the accounting and auditing of digital assets held by public companies. Specifically, the bulletin provided guidance on how public entities should treat obligations to safeguard third parties’ cryptocurrency on their balance sheets. In practice, the SEC expected public entities to include third-parties’ cryptocurrency holdings as liabilities in their own balance sheets. This has proven particularly problematic for banks, which are subject to balance sheet liquidity requirements. 

Put plainly, SAB 121 effectively prevents banks and other highly regulated entities from holding cryptocurrency in custody due to the impact it would have on their other core functions. On-balance sheet treatment is atypical for the custody of assets, an issue highlighted by the American Banking Association in a letter to Congress. The impact of on-balance sheet treatment is stark, essentially preventing “digital asset custody at scale” due to the cascade effect on other “prudential requirements such as capital, liquidity, and other mandates.” 

What does it mean?

On-balance sheet treatment means that publicly traded banks cannot practically provide custody services or experiment with digital assets. By limiting consumers’ ability to access and compare safe custodial services, SAB 121 undermines the very consumer protection objectives that President Biden cited as motivating his veto. The veto also elevates the policy determinations of SEC accounting staff over bipartisan majorities in both houses of Congress, which undermines the due process requirements the Administrative Procedures Act (APA) imposes on agency rulemaking. 

Coinbase Files Closing Brief Calling for Rulemaking from the SEC

What happened?

On May 31, Coinbase filed its closing brief in the Court of Appeals for the Third Circuit, arguing that the SEC should create clear rulemaking for the digital assets industry and that the SEC “offered no reason at all” in its denial of Coinbase’s rulemaking petition. The SEC is engaging in “a purposeful effort to destroy an industry by demanding the impossible and prosecuting companies that fail to achieve it,” Coinbase argues.

Coinbase first petitioned the SEC in July 2022, asking the agency to engage in formal rulemaking clarifying its jurisdiction over crypto by answering key questions about which digital assets should be considered investment contracts/securities and what are the registration and transparency requirements for crypto companies. In response, the SEC maintained its position that existing rules already apply to crypto and formally rejected Coinbase’s petition in December 2023. 

In March 2024, Coinbase brought the case before the Third Circuit, challenging the SEC’s denial of the petition for rulemaking and arguing that the SEC violated the Administrative Procedure Act (APA) by engaging in regulation by enforcement rather than established rulemaking processes. The SEC filed its opposition on May 10, reiterating its position that existing regulations are sufficient and are not “unworkable” for crypto asset securities as claimed by Coinbase. In the most recent closing brief, Coinbase bolstered its previous arguments under the APA, arguing that the SEC failed to provide a reasonable explanation to address Coinbase’s “workability” concerns, and requesting that the Court vacate the SEC’s denial of Coinbase’s petition and order the SEC to engage in rulemaking.

What does this mean?

Now that briefing is wrapped up, we will soon have an answer from the appellate court as to whether the SEC will be ordered to engage in rulemaking. This effort by Coinbase adds to the industry’s proactive approach to gaining regularity clarity and evidences the industry does want clear, workable rules. While legislative efforts like FIT 21 could bring clarity to the SEC’s jurisdiction over crypto, until a bill is signed into law, the SEC’s jurisdiction will largely be decided through the court system. 

Don’t forget to join DEF tomorrow (June 11) as we host our first “State of the Union” via an X Space. We look forward to seeing you there!


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