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. DAVIDSON. Mr. Speaker, I thank the chairman for yielding time.

Mr. Speaker, this accounting bulletin has proven to be a barrier to publicly traded banks having an ability to meaningfully engage in distributed ledger products due to their overly broad definition of a crypto asset. SAB 121 makes no distinction between asset types in use cases, but, instead, generally states that crypto assets pose certain technological, legal, and regulatory risks, requiring special on- balance-sheet treatment.

All other assets, if you want to make a deposit at a bank, they are glad to hold custody of the assets, but somehow these assets qualify for special treatment.

Normally, if there was on-balance-sheet treatment, it would also just be a clean entry. There wouldn't be a mark to mark it that would require not just a balance sheet treatment that would be appropriate for a custody of a certain kind of asset, but you would have income statement flow throughs and all kinds of other risks.

Why would a bank need to cover extra risk up to 100 percent of the deposit of an asset simply to take custody of the asset? This is a special treatment that applies just to these assets, so applying on- balance-sheet treatment for crypto assets wrongly subjects customer assets to creditors' claims in the event there was a failure of a custodial institution.

In a traditional bankruptcy, assets are accounted for on balance sheet and are subject to creditor claims. Conversely, assets held in custody for customers are accounted for off balance sheet and, thus, are protected from creditor claims in bankruptcy because they remain the assets of the company.

We would see this distinction in a company like Fidelity, where the assets are off balance sheet, versus a company like Silicon Valley Bank when they went bankrupt. The depositors were literally at risk. Why would we change the standard with this out-of-jurisdiction rulemaking by the SEC?

Requiring custody crypto assets to be accounted for on balance sheets risks losing the bankruptcy protections of custodial services. This is an important distinction from the treatment for a broker-dealer that would be subject to a different form of bankruptcy under the Securities Investor Protection Act. Distributor ledger technology does not change the underlying nature of risk of traditional assets, nor do they present risks that SAB 121 purports to address.

Mr. Speaker, I include in the Record three letters: A letter dated August 23, 2023, cosigned by Chairman McHenry and Representative Hill, sent to the Comptroller General at the Government Accountability Office, urging GAO to complete its assessment on whether the Congressional Review Act applies to SAB 121; a letter dated February 14, 2024, cosigned by the Bank Policy Institute, the American Bankers Association, the Financial Services Forum, and the Securities Industry and Financial Markets Association, sent to the SEC requesting a meeting with the SEC Chairman, Gary Gensler, urging him to reconsider SAB 121; and, lastly, a bipartisan, bicameral letter dated November 15, 2023, cosigned by five Representatives and two Senators, sent to the Federal Reserve, the OCC, the FDIC, NCUA, urging the agencies to withhold enforcement of SAB 121 in light of GAO's decision. House of Representatives, Committee on Financial Services, Washington, DC, August 23, 2023. Re SEC Staff Accounting Bulletin No. 121 and the Congressional Review Act Hon. Gene Dodaro, Comptroller General of the United States Government Accountability Office, Washington, DC.

Dear Comptroller Dodaro: We write to inquire about the status of the Government Accountability Office (GAO)'s decision regarding the applicability of the Congressional Review Act (CRA) to the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin No. 121 (SAB 121). We are concerned that SAB 121 is not guidance but rather should be considered a major action undertaken by the SEC. This letter underscores the request by Senator Lummis expressing her shared concern about the effect of SAB 121. To date, GAO has not rendered a decision.

To underscore Senator Lummis' position, SAB 121 should be construed as a rule for purposes of the CRA. SAB 121 is not an interpretive rule. It is not a general statement of policy. Rather SAB 121 is a major policy change that fundamentally impacts the way customer assets under custody are treated for balance sheet purposes. The Bulletin significantly impacts a number of entities within the SEC's purview but also state and nationally chartered banks and trust companies.

Separately, it is important to note that Congress continues to make progress on legislation establishing a regulatory framework to provide certainty for the digital asset ecosystem. The Committee's work to report out legislation governing both the issuance and use of payment stablecoins as well as the regulation of digital asset intermediaries is consistent with the recommendations made by GAO this past June. This legislative work should not be subverted by unelected bureaucrats through opaque and unaccountable processes such as SAB 121.

We encourage you to protect the prerogatives of the legislative branch by determining SAB 121 as a major rule and subject to the CRA. We appreciate your attention to this matter. Sincerely, Patrick McHenry,

Chairman, Committee on Financial Services. French Hill,

Chairman, Subcommittee on Digital Assets, Financial Technology, and Inclusion. ____ 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 financial 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. If you have any questions, please contact Paige Pidano Paridon. Respectfully submitted, Bank Policy Institute, American Bankers Association, Financial Services Forum, Securities Industry and Financial Markets Association. ____ Congress of the United States, Washington, DC, November 15, 2023. Hon. Martin Gruenberg, Chairman of the Board, Federal Deposit Insurance Commission, Washington, DC. Hon. Michael Barr, Vice Chair for Supervision, Board of Governors of the Federal Reserve System, Washington, DC. Hon. Michael Hsu, Acting Comptroller of the Currency, Office of the Comptroller of the Currency, Washington, DC. Hon. Todd Harper, Chairman of the Board, National Credit Union Administration, Alexandria, VA.

Dear Vice Chair Barr, Chairman Gruenberg, Chairman Harper, and Acting Comptroller Hsu: We write regarding Securities and Exchange Commission (SEC) Staff Accounting Bulletin 121 (``SAB 121'') published on April 11, 2022.

Last month, the Government Accountability Office (GAO) issued a legal decision that SAB 121 is a rule for purposes of the Congressional Review Act. SAB 121 was issued without consultation with any of your respective agencies and would require custodians to recognize a liability and a corresponding offset on their balance sheets, measured at the fair value of the customer custodial digital assets. This accounting approach, which deviates from established accounting standards, would not accurately reflect the underlying legal and economic obligations of the custodian, and places consumers at greater risk of loss.

In its decision, GAO stated that ``it is reasonable to believe that companies may change their behavior to comply with the staff interpretations found in the Bulletin'' due to the SEC's responsibility and authority in monitoring public disclosures and pursuing enforcement actions against noncompliant entities.

SAB 121 meets the definition of a rule under the Administrative Procedure Act (APA), and was never submitted to Congress or the GAO, nor was it subsequently published in the Congressional Record consistent with the requirements of the Congressional Review Act. Given that the SEC failed to meet these obligations, SAB 121 should have no legal effect and the Federal banking agencies and National Credit Union Administration should not require banks, credit unions and other financial institutions that provide custody services for digital assets to comply. This means that such entities need not recognize a liability and a corresponding asset offset on their balance sheets.

Enforcing this noncompliant rule would set a concerning precedent that would facilitate regulatory gamesmanship to circumvent the APA, effectively allowing the SEC to have regulatory authority over institutions which Congress did not authorize.

We therefore ask you to clarify, through guidance or other action, that SAB 121 is not enforceable in light of the recent GAO determination. Thank you for your attention to this matter. Sincerely, Patrick McHenry,

Member of Congress. French Hill,

Member of Congress. Ritchie Torres,

Member of Congress. Wiley Nickel,

Member of Congress. Cynthia M. Lummis,

United States Senator. Kirsten Gillibrand,

United States Senator. Mike Flood,

Member of Congress.

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