A host of banks and other financial institutions that have been in touch with the SEC staff have received the green flag to circumvent the controversial balance sheet reporting.
The exemptions come on the heels of these institutions ensuring that their customers’ assets will be protected in the event of bankruptcy or failure. Parallelly, they have also discharged internal safeguard measures intended to shield customer holdings better.
Citing an unnamed SEC source familiar with the agency’s approach, a recent report pointed out that “certain arrangements may not require a liability to be reported” on the balance sheet under the Staff Accounting Bulletin No. 121 [SAB 121] released in March 2021. The source added,
“The regulator believes that the guidance worked and companies have adjusted to address the threats that hacking and business failures have posed to investors.”
In fact, banks have been able to make their case behind closed doors with SEC staff that wallets and spot Bitcoin exchange-traded products should not fall under the crypto guidance ambit.
The SAB guidance was issued right before the collapse of firms from the crypto space that triggered 2022’s bear run. Celsius, Genesis, FTX, Terraform Labs, and Three Arrows Capital all fell one behind the other like dominoes.
At the time, there was not much clarity about how the regulations would pan out because several crypto industry participants failed to protect their customers by filing for bankruptcy.
With time, however, they have proved that the procedures in play have helped customers get back their assets in the case of any unforeseen event. As a result, their obligations under SAB 121 have been loosened.
As such, the controversial SAB 121 bulletin mandates firms involved in crypto custody to record customer crypto holdings as liabilities on their balance sheets. This is contrary to the usual treatment of assets under custody. They usually do not appear on the balance sheet because they belong to the client.
Another SEC source added,
"Anyone who demonstrates the ability to answer the questions raised by the SAB and has the technology and practices and procedures in place and all the things that other market participants who have come in and received this no objection guidance from our accounting staff—that is available to any entity that would want to be providing crypto asset safeguarding services."
The House and the Senate voted in favor of overturning the accounting bulletin recently. However, President Joe Biden vetoed the resolution towards the end of May.
On Thursday, the House yet again voted again to countermand the president’s veto and erase SAB 121 altogether but was unsuccessful in doing so. This means the measures, by and large, remain in place.
