22. March 2023

• Two US lawmakers have criticized crypto accounting guidelines outlined by the US Securities and Exchange Commission, arguing they place crypto customers at greater risk of loss.
• The guidelines require financial companies holding crypto for customers to recognize crypto assets they do not control as liabilities, and to show liabilities equal to customer crypto assets.
• Senators Cynthia Lummis and Representative Patrick McHenry argued that this will discourage regulated entities from engaging in digital asset custody, denying millions of Americans access to safe custodial arrangements.

Lawmakers Argue SEC Accounting Policy Places Crypto Customers at Risk

The United States Securities and Exchange Commission (SEC) issued a bulletin in April last year outlining their accounting treatment for digital assets. This included asking financial companies holding crypto for customers to recognize all digital assets they do not control as a liability, with liabilities equal to ALL customer crypto assets. However, two United States lawmakers – Senator Cynthia Lummis and Representative Patrick McHenry – have criticized these guidelines, arguing they places customers at greater risk of loss.

Effect of SAB 121

The lawmakers argued in a letter directed towards ranking individuals with the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Administration that while Staff Accounting Bulletin (SAB) 121 was intended to provide clarity on accounting treatment for digital assets, it had negative side effects. They stated that this would likely discourage regulated entities from engaging in digital asset custody which is opposite effect than what was intended. In conclusion, they wrote “the effect of SAB 121 is to deny millions of Americans access to safe and secure custodial arrangements for digital assets”.

Criticism Over Guidelines

The criticism over these guidelines has come from both regulators and legislators alike who feel that it does not protect customers adequately enough from potential losses should something happen such as if a custodian were to become insolvent or enter receivership. It has been suggested that recognizing crypto-assets as liabilities could increase risk levels due its implications on liquidity issues when it comes time for financial companies trying to settle payments with their clients in a timely manner.

What Could Be Done?

In order for there to be better protection given under these regulations some alternatives have been suggested such as allowing firms providing cryptocurrency services more flexibility when it comes time for them calculating their customer’s balance sheets or offering certain exemptions related towards storage solutions specifically designed towards cryptocurrencies which would help decrease risks associated with insolvency events related towards custodians themselves.

Conclusion

Overall both legislators and regulators agree that there needs to be reform made surrounding these regulations in order for customers using cryptocurrency services feel safer when investing or participating within this emerging industry as a whole. In addition more clarity should also be provided regarding how exactly firms should handle customer funds along with other types of security measures which could prevent any kind of mismanagement or fraud activities taking place within the space itself