GAO Supports Congressional Oversight of SEC’s Crypto Regulation

A significant development within the cryptocurrency community revolves around the Government Accountability Office (GAO) issuing a consequential decision on October 31, as championed by United States Senator Cynthia Lummis. This decision highlights the controversial nature of the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 and argues for its inclusion under the umbrella of congressional oversight. The said bulletin, introduced in March 2022, has been a subject of considerable concern among pro-crypto lawmakers and enthusiasts, notably for its potential impact on the crypto industry.

Senator Cynthia Lummis had initiated this action by sending a letter to the U.S. Comptroller General in August 2022, seeking clarification on whether the SEC’s Staff Accounting Bulletin 121 should fall within the purview of the Congressional Review Act (CRA). The CRA stipulates that agency rules must undergo a review process involving submission to the comptroller general and both chambers of Congress, providing Congress with the authority to disapprove of the rule in question. In their assessment, the GAO applied the definition of a rule found in the Administrative Procedures Act (APA) and concluded that the SEC’s bulletin should indeed be subject to the CRA.

In their official statement, the GAO reasoned that the bulletin is likely to influence companies’ behavior by encouraging them to adhere to the staff’s interpretations outlined in the Bulletin. Additionally, they emphasized that the bulletin is designed to have future effects and serves to interpret and prescribe policy, thus satisfying the definition of a rule under the APA.

The SEC has characterized the bulletin as an expression of the staff’s views regarding the accounting for obligations related to safeguarding crypto-assets held by entities for their platform users. The SEC has clarified that staff accounting bulletins are not considered official rules or interpretations of the Commission and are not published with the Commission’s official endorsement. Instead, they represent staff interpretations and practices.

SEC Crypto Accounting Sparks Political Backlash

The bulletin, in practical terms, employed hypothetical scenarios to illustrate what the SEC deemed to be best practices for safeguarding crypto-assets held by platforms for their users. Prominent platforms like Coinbase and PayPal were directly impacted by these recommendations. Specifically, the bulletin advised such platforms to record their users’ assets on their balance sheets as both liabilities and assets at their fair value during initial recognition. This marked a significant departure from established accounting practices, where custodied assets were typically not included on balance sheets.

The bulletin’s introduction triggered a flurry of objections from various quarters. SEC Commissioner Hester Peirce expressed strong dissent just days after its issuance, arguing that the accounting procedures outlined in the bulletin were a response to risks for which the SEC itself bore some responsibility.

In a collective demonstration of disapproval, five Republican senators, including Senator Lummis, sent a letter to SEC Chairman Gary Gensler in June 2022, criticizing what they perceived as “backdoor regulation” stemming from the bulletin. Moreover, in September of the same year, Representative Mike Flood took the opportunity to rebuke Chairman Gensler regarding the bulletin when Gensler appeared before the House Financial Services Committee.

It’s important to note that the findings of the GAO represent recommendations, but as the agency points out, these recommendations tend to carry considerable weight, with agencies frequently taking them into account when making decisions. The crypto community and its stakeholders are keenly watching the unfolding implications of this GAO decision and its potential consequences for the SEC’s Staff Accounting Bulletin 121.