Providing for Congressional Disapproval of the Rule Submitted By the Securities and Exchange Commission Relating to ``Staff Accounting Bulletin No.
Floor Speech
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Mr. BARR. Mr. Speaker, I thank the chairman for his leadership on this issue.
Mr. Speaker, I stand in front of you today to support my friend and colleague from Nebraska (Mr. Flood) and his CRA resolution to nullify the SEC's Staff Accounting Bulletin Number 121 which would eviscerate financial institutions' ability to provide custodial services for digital asset firms.
In theory, under SAB 121, a bank could custody digital assets. However, the conditions set forth by SAB 121 make it impractical for any bank. This very fact has been noted by Federal Reserve Board Chair Powell who acknowledged it shifts away from traditional custodial practices as custodial assets receive off-balance-sheet treatment.
SAB 121 overturns decades of precedent regarding the accounting assets for banks. If a bank decides to custody digital assets and adhere to SAB 121, then the on-balance-sheet requirement would have significant capital, liquidity, and other prudential consequences. This makes it difficult, at best, for regulated institutions to safeguard digital assets.
The fact is that technological, legal, and regulatory risks cited in SAB 121 are already addressed by the legal and regulatory framework that applies to banks' custodial activities. Yet, SAB 121 did not account for that.
Moreover, and disturbingly, the SEC did not consult with any of the prudential regulators before issuing this flawed guidance. Unfortunately, the failure to consult the regulators overseeing institutions that are largely impacted by an SEC proposal has become quite common under Chair Gensler.
The SEC does not have the expertise to assess the same risks as the prudential regulators, and it is not the role of Gary Gensler to propose misguided rulemakings and guidance that may have major adverse implications to the functioning of our financial institutions, and ultimately to the safety and soundness of our financial system.
Given the implications for financial institutions' ability to safeguard assets under this rule and the clear lack of understanding regarding their prudential standards and guidance from their primary regulators, this rule is fatally flawed.
The fact of the matter is to the extent there is concern about a lack of regulation, if there is concern about a lack of regulatory clarity or risk with crypto, then we should not make it impossible, as a practical matter, for well-regulated banks to protect Americans who own digital assets with custody services.
Mr. Speaker, if you want to protect customers and if you want to protect investors in digital assets, then we shouldn't be pushing crypto transactions into less transparent and more opaque, riskier offshore places, but that is exactly what SAB 121 would do.
I have to address this issue. Silicon Valley Bank's failure had to do with deposit concentration risk and interest rate mismanagement. It had nothing to do with the fact that many of its customers were technology firms or worked in the blockchain space. It had nothing to do with that. That is a red herring.
This is why I support Mr. Flood's measure, I support the bipartisan work, and I encourage my colleagues to support it as well.
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Mr. BARR. Mr. Speaker, I thank the gentleman for yielding.
In conclusion, Mr. Speaker, I include in the Record a letter dated March 2, 2023, cosigned by Chairman McHenry and Senator Lummis sent to the Fed, OCC, FDIC, and NCUA asking them about SAB 121's impact on regulated entities, and also asking if they were consulted prior to SAB 121's issuance. Congress of the United States, Washington, DC, March 2, 2023. Re Prudential Impact of Staff Accounting Bulletin 121. Hon. Michael Barr, Vice Chair for Supervision, Board of Governors of the Federal Reserve System, Washington, DC. Mr. Michael Hsu, Acting Comptroller, Office of the Comptroller of the Currency, Washington, DC. Hon. Marty Gruenberg, Chairman of the Board, Federal Deposit Insurance Corporation, Washington, DC. Hon. Todd Harper, Chairman of the Board, National Credit Union Administration, Alexandria, VA.
Dear Vice Chair Barr, Chairman Gruenberg, Chairman Harper, and Mr. Hsu: We write regarding Securities and Exchange Commission (SEC) Staff Accounting Bulletin 121 (``SAB 121'') published on April 11, 2022. SAB 121 was intended to clarify the accounting treatment of digital assets safeguarded by custodians, exchanges, and other platforms engaged in digital asset activities. However, SAB 121 places customer assets at greater risk of loss if a custodian becomes insolvent or enters receivership, violating the SEC's fundamental mission to protect customers.
Our concern stems from SAB 121's directive that companies recognize a liability and a corresponding offset on their balance sheets, measured at the fair value of the customer custodial digital assets. A recent decision in the Celsius bankruptcy, which classified all Celsius' customers as unsecured creditors, and therefore at the back of the line to recover their assets, highlights the legal risk of effectively forcing customer custodial assets to be placed on balance sheet. Additionally, SAB 121 upends decades of precedent regarding the accounting treatment of custodial assets for banks, credit unions and other regulated financial institutions.
Federal Reserve Board Chair Powell noted this shift away from traditional custodial practices in testimony before the Senate Banking Committee on June 22, 2022. Typically, custodial assets receive off-balance sheet accounting treatment. This is largely because customers retain ownership of their custodial assets and financial institutions are not permitted to conduct proprietary trading with customer assets. As emphasized in comment letters, SAB 121 ``deviates from existing accounting treatment of safeguarded assets held in a custodial capacity, which does not result in assets or liabilities reported on the custodian's balance sheet.''
Furthermore, the breadth of the ``digital asset'' definition in SAB 121 covers any ``digital asset that is issued and/or transferred using distributed ledger or blockchain technology using cryptographic techniques.'' The scope of assets covered by this broad definition, whether virtual currency, stablecoins, or even tokenized equities, is unclear. This is concerning because a more nuanced hierarchy for this asset class which considers the opportunities and risks of digital assets with different functions is necessary. For example, the Bank for International Settlements' Prudential Treatment of Crypto Assets framework differentiates between various types of digital assets for bank capital purposes.
Since SAB 121 purports to require banks, credit unions and other financial institutions to effectively place digital assets on their balance sheets, it would trigger a massive capital charge. This in turn is likely to prevent these prudentially regulated entities from engaging in digital asset custody. To the contrary, we should be encouraging prudentially regulated financial institutions, like banks and credit unions, to provide digital asset services precisely because they are subject to the highest standards of capital, liquidity, recovery and resolution, custody, cyber-security, and risk management.
In sum, the effect of SAB 121 is to deny millions of Americans access to safe and secure custodial arrangements for digital assets. For these reasons, please respond to the following questions regarding the impact of SAB 121 on banks, credit unions, and other financial institutions:
(1) Was your agency contacted by the SEC prior to the issuance of SAB 121? If so, please identify the staff members consulted by the SEC and provide copies of written feedback, if any, provided to SEC staff.
(2) Has the SEC indicated that it will modify or withdraw SAB 121 in light of widespread comments that the Bulletin is flawed?
(3) What are the legal and supervisory reasons off-balance sheet treatment of custodial assets has historically been the norm for banks and credit unions?
(4) Has your agency directed banks and other financial institutions within your jurisdiction to comply with the terms of SAB 121 for the purposes of capital adequacy, business plan change approvals, reporting and other supervisory matters? If not, do you plan to do so?
(5) Does SAB 121 conflict with your agency's input regarding the Basel Committee on Bank Supervision's Prudential Treatment for Crypto Asset exposures, in so far as the definition of ``digital asset'' under SAB 121 also encompasses Group 1a, Group 1b, and Group 2 digital assets under the Prudential Treatment framework?
(6) Do you agree that the capital charge for banks, credit unions, and other financial institutions under SAB 121 is prohibitive?
(7) Do you agree that SAB 121 potentially weakens consumer protection by preventing well-regulated banks, credit unions, and other financial institutions from providing custodial services for digital assets?
We would appreciate a response no later than March 16, 2023. Thank you for your attention to this matter. Sincerely, Sen. Cynthia M. Lummis,
Senate Banking Committee. Rep. Patrick McHenry,
Chairman, House Financial Services Committee.
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Mr. BARR. Mr. Speaker, I include in the Record a letter dated April 6, 2023, sent by OCC Acting Comptroller Hsu to Chairman McHenry and Senator Lummis in response to their March 2, 2023, letter. Office of the Comptroller of the Currency, April 6, 2023. Hon. Cynthia Lummis, Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, DC. Hon. Patrick McHenry, Chairman, Committee on Financial Services, U.S. House of Representatives, Washington, DC.
Dear Senator Lummis and Chairman McHenry: Thank you for your letter dated March 2, 2023, concerning the impact of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin Number 121 (SAB 121) on institutions regulated by the Office of the Comptroller of the Currency (OCC).
The OCC recognizes that the SEC plays an important role in developing financial reporting standards applicable to publicly listed companies in the United States. Federal law (12 U.S.C.1831n) requires all national banks and federal savings associations to follow reporting standards that are no less stringent than U.S. Generally Accepted Accounting Principles (GAAP), regardless of public listing status. We understand that these institutions, in consultation with their auditors, are analyzing the intersection of SAB 121 and GAAP. The OCC is monitoring these discussions.
Please see responses below to your specific questions.
(1) Was your agency contacted by the SEC prior to the issuance of SAB 121? If so, please identify the staff members consulted by the SEC and provide copies of written feedback, if any, provided to SEC staff.
The SEC did not consult with the OCC prior to the issuance of SAB 121.
(2) Has the SEC indicated that it will modify or withdraw SAB 121 in light of widespread comments that the Bulletin is flawed?
The OCC has not participated in any communications with the SEC in which the SEC indicated it would modify or withdraw SAB 121.
(3) What are the legal and supervisory reasons off-balance sheet treatment of custodial assets has historically been the norm for banks and credit unions?
Section 37(a) of the Federal Deposit Insurance Act (12 U.S.C. 183n(a)) requires that the Federal banking agencies prescribe accounting principles for regulatory reporting purposes that are no less stringent than U.S. GAAP. Under U.S. GAAP, custodial assets are generally not reported on the bank's balance sheet provided that client assets held in custody are properly segregated and held separately from the bank's assets
(4) Has your agency directed banks and other financial institutions within your jurisdiction to comply with the terms of SAB 121 for the purposes of capital adequacy, business plan change approvals, reporting and other supervisory matters? If not, do you plan to do so?
The OCC worked with the other members of the Federal Financial Institutions Examination Council to provide regulatory reporting instructions to banks that provide for each bank to determine whether it is appropriate to apply SAB 121 for financial reporting purposes. If a bank determines that it is appropriate to follow SAB for financial reporting purposes, the bank should also prepare its Consolidated Reports of Condition and Income in the same manner.
(5) Does SAB 121 conflict with your agency's input regarding the Basel Committee on Bank Supervision's Prudential Treatment for Crypto Asset exposures, in so far as the definition of ``digital asset'' under SAB 121 also encompasses Group 1a, Group 1b, and Group 2 digital assets under the Prudential Treatment framework?
The Basel Committee on Banking Supervision (BCBS) defines cryptoassets as ``private digital assets that depend on cryptography and distributed ledger technologies (DLT) or similar technologies. Digital assets are a digital representation of value, which can be used for payment or investment purposes or to access a good or service.''
While the final BCBS cryptoasset standard applies different capital treatments to Group 1 and Group 2 cryptoasset exposures, the standard states that custodial service activities are not considered ``exposures'' for the purposes of the standard.
(6) Do you agree that the capital charge for banks, credit unions, and other financial institutions under SAB 121 is prohibitive?
The OCC expects banks to hold capital commensurate with the nature and extent of the risks of their activities) For national trust banks, OCC Bulletin 2007-21, ``Supervision of National Trust Banks: Revised Guidance: Capital and Liquidity,''provides that the minimum capital is informed by analysis of quantitative and qualitative factors including, but not limited to, financial projections, fixed and variable expenses, the nature of fiduciary products and services being proposed, and discussions with organizers.
(7) Do you agree that SAB 121 potentially weakens consumer protection by preventing well-regulated banks, credit unions, and other financial institutions from providing custodial services for digital assets?
The OCC will continue to monitor this issue and work to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations, including consumer protection laws.
If you have any questions or need additional information. please do not hesitate to contact me or Carrie Moore, Director, Public Affairs and Congressional Relations. Sincerely, Michael J. Hsu, Acting Comptroller of the Currency.
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Mr. BARR. Mr. Speaker, I also include in the Record a letter dated March 16, 2023, sent by NCUA Chairman Harper in response to Chairman McHenry's and Senator Lummis' March 2, 2023, letter. National Credit Union Administration, Alexandria, VA, March 16, 2023. Hon. Patrick McHenry, Chairman, U.S. House Committee on Financial Services, U.S. House of Representatives, Washington, DC.
Dear Chairman McHenry: Thank you for contacting the National Credit Union Administration about the implementation of Staff Accounting Bulletin 121. The increase in consumers and businesses using digital assets, including cryptocurrency, has impacted the financial services industry, which includes both credit unions and banks. It is therefore important to develop a balanced policy approach to address emerging risks to the safety and soundness of federally insured credit unions.
Your letter requests responses to several questions, which reflect the NCUA's supervisory role over federally insured credit unions. Our responses follow.
(1) Was your agency contacted by the SEC prior to the issuance of SAB 121? If so, please identify the staff members consulted by the SEC and provide copies of written feedback, if any, provided to SEC staff.
The NCUA was not contacted.
(2) Has the SEC indicated that it will modify or withdraw SAB 121 in light of widespread comments that the Bulletin is flawed?
The NCUA is not aware of the SEC's intent to modify or withdraw SAB 121.
(3) What are the legal and supervisory reasons off-balance sheet treatment of custodial assets has historically been the norm for banks and credit unions?
The off-balance sheet treatment of custodial assets is rooted in generally accepted accounting principles, or GAAP for short. The GAAP standard evolved from the concept of the principal agent relationship, where the reporting of an asset belonged to the entity that controlled the asset and ownership rights were not passed to the custodian. As the custodian did not have ownership rights--that is, the ability to buy, sell, or leverage the asset--the custodian did not report those types of assets in its financial statements. The concept is codified in the Accounting Standards Codification Topic 860 Transfers and Servicing, where ``transfers of the custody of financial assets for safekeeping'' is excluded from accounting for transfers and servicing of financial assets.
(4) Has your agency directed banks and other financial institutions within your jurisdiction to comply with the terms of SAB 121 for the purposes of capital adequacy, business plan change approvals, reporting and other supervisory matters? if not, do you plan to do so?
The NCUA has not directed credit unions to comply with SAB 121 for any purpose. SAB 121 is a requirement of public registrants and does not apply to credit unions, which are cooperatively owned by their members.
(5) Does SAB 121 conflict with your agency's input regarding the Basel Committee on Bank Supervision's Prudential Treatment for Crypto Asset exposures, in so far as the definition of ``digital asset'' under SAB 121 also encompasses Group 1a, Group 1b, and Group 2 digital assets under the Prudential Treatment framework?
The NCUA is neither a member of the Basel Committee nor does it provide input on Bank Supervision's Prudential Treatment for Crypto Asset exposures.
(6) Do you agree that the capital charge for banks, credit unions, and other financial institutions under SAB 121 is prohibitive?
If SAB 121 is eventually applied to nonpublic entities, it will have implications for assessing the adequacy of an insured credit union's net worth. If a credit union functions as a digital asset custodian and is required to reflect the digital assets held in custody on its balance sheet, the credit union's net worth ratio would be negatively impacted as the institution's assets would increase without a commensurate increase in the net worth.
(7) Do you agree that SAB 121 potentially weakens consumer protection by preventing well-regulated banks, credit unions, and other financial institutions from providing custodial services for digital assets?
Prior to the release of SAB 121, the NCUA issued a Letter to Credit Unions on Relationships with Third Parties that Provide Services to Digital Assets. As stated in that letter, the NCUA would not take exception to credit unions partnering with third parties to make digital asset services available to members. That letter also outlines the NCUA's expectations that credit unions conduct adequate due diligence and ensure compliance with all applicable laws and regulations when engaging in any such activity. The NCUA is not able to determine the impact of adopting SAB 121 at publicly traded financial institutions that offer custody services of digital assets and cannot make a broad determination of the impact on consumer protection.
Thank you for raising this issue with the NCUA. If you have additional questions, please feel free to contact me or have your staff contact Elizabeth Eurgubian in our Office of External Affairs and Communications. Sincerely, Todd M. Harper, Chairman.
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