A bipartisan group of lawmakers has introduced resolutions in both chambers of Congress seeking to repeal a controversial crypto accounting rule issued by the Securities and Exchange Commission (SEC) last year.

The rule, known as the Staff Accounting Bulletin No. 121 (SAB 121), requires companies that custody cryptocurrencies for clients to reflect those assets on their own balance sheets. Critics argue this imposes an undue burden on banks and other financial firms looking to provide crypto custody services to investors.

Why Are Lawmakers Targeting This Rule?

The repeal effort is being led by Senator Cynthia Lummis (R-WY), Congressman Mike Flood (R-NE), and Congressman Wiley Nickel (D-NC), who say that the SEC overstepped its authority when it issued the rule without properly consulting Congress or other regulators.

“The SEC issued SAB 121 without conferring with prudential regulators despite the accounting standard’s effects on financial institutions’ treatment of custodial assets, and the SEC issued SAB 121 without going through the notice-and-comment process”, said Rep. Flood.

The lawmakers introduced identical resolutions under the Congressional Review Act (CRA), which allows Congress to overturn federal regulations with a simple majority vote. If successful, their effort would prohibit the SEC from demanding compliance with these unilaterally approved rules by financial institutions.

It’s impossible to determine what effects the act would have on the cryptocurrency market but it seems likely that it would be positive because of the SEC’s famous hesitancy towards the blossoming industry.

Industry Groups Welcome Efforts to Repeal ‘Onerous’ Rule

The repeal effort has been welcomed by both the crypto and banking industries, who argue that SAB 121 imposes excessive capital requirements that discourage banks from providing crypto custody despite many having the operational capacity to do so safely.

“SAB 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”, said the American Bankers Association in a statement supporting the repeal.

Also read: Nasdaq to Provide Crypto Custody Service, Expects ‘Mass Institutional Adoption’ of Digital Assets

The Bank Policy Institute also nodded to the initiative, commenting that the actions from lawmakers confirmed their views about the rule, which is that it effectively discourages “highly regulated U.S. banking organizations from providing a custodial solution for digital assets at scale”.

Other groups like the Securities Industry and Financial Markets Association (SIFMA) and the Financial Services Forum concurred that the SEC’s unilateral approach has made banks wary of providing crypto custodial services due to balance sheet and regulatory concerns created by the rule.

We should take these statements with a grain of salt, however, as they were included as part of Flood, Lummis, and Nickel’s press release announcing the proposed rule change so they may have been cherry-picked. But it’s hard to imagine that many top banks would complain about the deregulation of their industry.

Lawmakers Allege the Rule Should Never Have Been Instated

The team of legislators is alleging that not only is the rule bad for the banking and crypto industries but that it was also instated improperly without sufficient consultation of other regulators and the public at large.

In issuing SAB 121, the SEC did not undertake a public consultation process or coordinate with other financial regulators as is typical for major policy changes. Lummis and company allege that their actions violated administrative and procedural requirements.

“SAB 121 has massive implications, and the SEC should have received feedback on it from the federal banking regulators and the public before implementing this legally binding directive”, emphasized Senator Lummis.

Also read: SEC Draft Rules Will Make it Harder for Crypto Firms to be ‘Qualified Custodians’ in Blow to Fund Industry

Last November, several congress members including Lummis urged financial regulators in a memo that they must provide guidance regarding SAB 121 as the policy was considered unenforceable according to a review by the Government Accountability Office (GAF).

The GAO found evidence that suggested that SAB 121 should actually be classified as a legislative “rule” rather than mere guidance. If so, that would mean the SEC failed to meet the procedural consultation and cost-benefit analysis requirements to fully roll it out and enforce it.

Crypto Industry Welcomes Congressional Scrutiny of Restrictive Policies

The crypto industry has welcomed lawmakers’ attempt to roll back SAB 121, which it sees as emblematic of the SEC’s tendency to constrain digital asset development through expansive interpretations of its mandate.

“The Chamber of Digital Commerce applauds the bipartisan initiative taken by [Lummis, Flood, and Nickel] for their commitment to overturning the [SEC’s SAB 121]”, said the Chamber of Digital Commerce, a crypto advocacy group, in a statement.

Other industry participants and many crypto supporters argue that limiting the ability of banks and financial firms to provide crypto custody leaves investors with few choices beyond loosely regulated crypto-native companies.

Critics of the rule suggested that it is likely doing more harm than good in terms of consumer protection as it moves crypto banking outside of the traditional US banking industry for the most part.

Banks and bank lobbyists agree, of course.

“The result is that digital asset custodial services are currently offered by a multitude of non-banking organizations, keeping the activity outside the prudential perimeter and outside of banks with comprehensive and robust risk management practices, thus increasing risks for customers”, commented the Bank Policy Institute.

Next Steps Unclear as SEC Declines to Comment

The SEC has thus far declined to comment on the repeal effort or address lawmakers’ accusations of overreach in implementing SAB 121 last year.

Unless the agency revises its position, the fate of the rule will come down to an eventual simple majority vote in Congress. However, the timeframe for that remains unclear and this congress is not exactly jumping over itself to collaborate in any kind of bipartisan manner.

Regardless of the outcome, the showdown underscores the increasing scrutiny crypto markets can expect from policymakers amid ongoing debates over their appropriate regulatory oversight.

While the SEC is unlikely to back down from its stance easily, lawmakers have shown their willingness to act when they believe that the agency is exceeding its authority, as seen recently with the approval of spot Bitcoin ETFs following a court order.

As crypto adoption continues apace, regulators and legislators will continue wrestling over the guardrails around digital asset innovation.