SEC’s Gensler Takes Charge of Cryptocurrency Custody Guidance Again in Hui ScrgruppEn

SEC Chairman Gary Gensler told a House Financial Services Committee hearing on Sept. 27 that he enjoys testifying before the committee. He had more than four hours of fun that day, much of which was devoted to criticizing his agency’s policies and actions.

Among the long list of resentments, one of the most narrowly focused was Rep. Mike Flood’s questioning of the SEC’s Staff Accounting Bulletin (SAB) 121, which was issued in March 2022. The SAB concerned the accounting and disclosure of crypto assets held in custody. Public companies such as banks and platforms like Robinhood and Coinbase.

Flood confirmed Gensler’s previous testimony before the committee that the SEC did not consult with prudential regulators before publishing the SAB report. Flood continued that the Financial Accounting Standards Board (FASB), a private body that issues standards related to generally accepted accounting principles (GAAP), has not issued anything related to the custody of digital assets. Instead, the FASB added digital asset accounting standards to its agenda in May 2022, following the publication of SAB 121.

SEC Chairman Gary Gensler testifies before the House Financial Services Committee. Source: GOOP Financial Services YouTube channel

Gensler said at a previous hearing that SAB 121 provides guidance on applying existing requirements under SEC rules, Flood said. Flood asked what requirements are there? Gensler responded that there was a rule as of 2009 regarding the custody of digital assets by investment advisers, and that the agency had “finalized something related to special-purpose brokers,” Gensler responded. It appears he was referring to an SEC rule to make In April 2021.

“There were no SEC rules on the books that directly addressed custody of digital assets,” Flood responded. He added that rules on custody, including the custody of digital assets, were proposed in February 2023 and have not yet been finalized, concluding:

“At the time the prospectus was issued, there had been no action by the Financial Accounting Standards Board (FASB), nor rulemaking by the Securities and Exchange Commission (SEC) on this topic. […] The SEC’s justification for issuing the prospectus is based on accounting guidelines that did not exist when the prospectus was issued.

Either the SEC knew there was no “strong” justification for issuing the guidance in the prospectus and did so anyway, or it did so in error, Flood said.

Related: Coinbase CEO Says Funds Are Safe Amid Bankruptcy Protection Fears

SAB 121 requires disclosure of technological, legal and regulatory risks associated with custody of digital assets. It was met with opposition from the beginning. SEC Commissioner Hester Peirce issued a critical response on the day of its release. Five senators, including cryptocurrency advocate Cynthia Lummis, sent a letter to Gensler in June calling the SAB “a regulation disguised as employee guidance.” Loomis and Commission Chairman Patrick McHenry sent another letter to prudential regulators in March, saying the SAB was putting the interests of cryptocurrency holders at greater risk than before its issuance.

Four members of the Financial Services Committee — Flood, Willie Nickel, Tom Emmer, and Richie Torres — sent a letter to Gensler the day before calling on him to approve spot bitcoin exchange-traded funds. This issue was not followed closely at the hearing.

Gensler told Nickel that the SEC “remains under advisement” on the Grayscale case after the company won an appeal against the SEC’s decision to deny a Bitcoin ETF application. Committee member Warren Davidson expressed concern that the SEC would not approve spot bitcoin applications in the order in which they were received, in light of the grayscale decision. Gensler responded that the requests were still under “active consideration.”

Emer criticized Gensler, claiming that he was not impartial in the financial industry. Torres involved Gensler in interpreting the Howey test.

Magazine: Cryptocurrency Regulation: Does SEC Chairman Gary Gensler Have the Final Say?

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