President Biden Vetoes Resolution to Overturn SEC’s Crypto Custody Guidelines

In a decisive move reflecting the ongoing tension between regulatory bodies and the burgeoning cryptocurrency industry, U.S. President Joe Biden has vetoed H.J.Res. 109, a congressional resolution aimed at overturning the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 121 (SAB 121). This bulletin mandates that financial institutions holding cryptocurrency for customers must record these assets as liabilities on their balance sheets.

H.J.Res. 109, backed primarily by Republicans but with notable bipartisan support, passed both the House and the Senate with substantial majorities. The House approved the measure by a vote of 228 to 182, while the Senate followed suit with a vote of 60 to 38. The resolution was driven by concerns that SAB 121’s stringent requirements would inhibit financial institutions’ ability to work with crypto assets, thereby stifling innovation and growth within the crypto industry.

Despite the bipartisan backing, President Biden’s veto underscores his administration’s commitment to maintaining rigorous oversight and safeguarding investor interests. Biden argued that overturning SAB 121 would undermine the SEC’s authority and its ability to establish necessary regulatory frameworks.

In his message to the House of Representatives, President Biden emphasized the importance of protecting consumers and investors from potential financial instability. He stated, “This reversal of the considered judgment of SEC staff in this way risks undercutting the SEC’s broader authorities regarding accounting practices. My Administration will not support measures that jeopardize the well-being of consumers and investors.”

Biden’s administration has consistently advocated for appropriate regulatory guardrails that balance the innovative potential of crypto-assets with the need for financial stability. The president reiterated his openness to collaborate with Congress on crafting a comprehensive and balanced regulatory framework for digital assets. This approach aims to promote responsible development and innovation in the digital asset space while ensuring the United States remains a leader in the global financial system.

The veto has elicited strong reactions from various stakeholders. The crypto community and several lawmakers have expressed significant disappointment. The Blockchain Association, a prominent crypto advocacy group, criticized the administration for overriding bipartisan majorities in Congress, suggesting that the decision would harm the industry’s growth and innovation.

Cody Carbone, chief policy officer at the Digital Chamber, labeled the veto as “a slap in the face to innovation and financial freedom.” Similarly, Ripple CEO Brad Garlinghouse described the decision as “incredibly disappointing,” especially during a critical time for the industry.

On the legislative front, some Democrats, including Senate Majority Leader Chuck Schumer, had supported the resolution, highlighting the substantial bipartisan concern regarding the SEC’s approach. Senator Ron Wyden, a Democrat who voted for the resolution, argued that the guidance created a different standard for crypto compared to other assets, potentially disadvantaging the industry.

The debate over SAB 121 is part of a larger conversation about the role of regulation in the fast-evolving crypto market. The SEC has maintained that SAB 121 is essential for enhancing transparency and protecting investors. An SEC spokesperson noted, “Time and again, we have seen crypto firms fail and watched as their customers lined up at the bankruptcy court in hopes of getting what they thought was legally theirs. These disclosures provide investors important line of sight into the level of risk taken by crypto custodians.”

However, critics argue that such stringent requirements could drive crypto businesses away from regulated financial institutions, pushing them towards less secure and transparent alternatives. This tension between fostering innovation and ensuring market stability remains a key challenge for regulators and lawmakers.

Moving forward, President Biden’s administration has signaled its willingness to engage with Congress to develop more nuanced and effective regulatory frameworks for digital assets. This effort aims to balance the need for robust consumer protections with the desire to support technological innovation and maintain the United States’ competitive edge in the global financial landscape.