U.S. Senator Cynthia Lummis and Congressman Patrick McHenry say a Securities and Exchange Commission accounting directive “places customer assets at greater risk of loss if a custodian becomes insolvent or enters receivership.”

In a Thursday letter to federal officials at the FDIC, Federal Reserve, the Office of the Comptroller of the Currency, and National Credit Union Administrator, the lawmakers called out SAB 121—a Staff Accounting Bulletin issued by the SEC last April.

While the bulletin was intended to clarify how to account for digital assets held by custodians, exchanges, and other platforms, Lummis and McHenry say its pronouncements would place customer assets at greater risk of loss in case of a custodian’s collapse, “violating the SEC’s fundamental mission to protect customers.”

At issue is 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.

The lawmakers cited a subsequent decision in the Celsius bankruptcy, which classified all Celsius’ customers as unsecured creditors and thus placed them “at the back of the line to recover their assets.”

“SAB 121 upends decades of precedent regarding the accounting treatment of custodial assets for banks, credit unions, and other regulated financial institutions,” the letter states, explaining that requiring them to effectively place digital assets on their balance sheets “would trigger a massive capital charge.”

A company’s balance sheet is a financial statement that reports assets, liabilities, and shareholder equity at a specific time. Off-balance items are those not owned by or are a direct obligation of the company.

Lummis and McHenry also said the SEC bulletin did not clearly define digital assets.

“The scope of assets covered by this broad definition, whether virtual currency, stablecoins, or even tokenized equities, is unclear,” they wrote. “A more nuanced hierarchy for this asset class— which considers the opportunities and risks of digital assets with different functions—is necessary.”

The letter asks the agencies if they plan to direct banks and other financial institutions within their jurisdiction to comply with the terms of the bulletin or if they believe the SEC bulletin potentially weakens consumer protection by preventing well-regulated banks, credit unions, and other financial institutions from providing custodial services for digital assets.

Lummis and McHenry gave the agencies until March 16 to clarify several points, including whether they were contacted by the SEC before the issuance of SAB 121 and whether the SEC indicated that it planned to modify or withdraw the bulletin if the agency received widespread comments that the bulletin is flawed.

Under Chair Gary Gensler, the SEC has stepped up enforcement actions in the wake of the collapse of FTX in November 2022. Some, including members of Congress, have called into question Gensler’s handling of the crypto industry and dealings with Sam Bankman-Fried, former CEO of FTX.

In recent months, the SEC has taken legal actions, including hefty fines against several prominent crypto-related companies, including digital streaming platform Lbry and cryptocurrency exchange Kraken.

Source: Decrypt.co

The post U.S. Lawmakers Say SEC Directive May Bring “Greater Risk of Loss” appeared first on Crypto Breaking News.

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Filed under: News - @ March 3, 2023 3:41 am