As crypto mainstream adoption is growing by the day, lawmakers and institutions across the globe are scrambling to force regulations in this sector.
The heat of this intense race has resulted in an ongoing conflict between US lawmakers and the country’s Securities and Exchange Commission (SEC). With 2024 being the presidential elections year in the US, this tussle between SEC and lawmakers has become a feud for control versus autonomy as crypto enthusiasts nervously wait for a clearer picture to emerge.
At the heart of the debate is Financial Innovation and Technology for the 21st Century Act (FIT21) introduced by lawmakers, which seeks to define certain cryptocurrencies as digital commodities. The act will potentially limit the SEC’s oversight in favour of a more defined regulatory framework that encourages innovation while safeguarding investor interests.
A draft bill of FIT21 Act aims to provide clearer guidelines and definitions for crypto assets and suggests a more defined role for the SEC and the Commodity Futures Trading Commission (CFTC).
At the same time, the SEC continues to force its authority over the crypto market, treating many digital assets as securities under existing laws. This stance is reflected in the agency’s active litigation against major platforms like Binance and Coinbase. This highlights the need for a clear crypto regulations environment to protect investors and support the growth of legitimate crypto innovations.
Moreover, while the proposed legislation could potentially streamline the regulatory process, it has also sparked a debate on the balance of power between federal agencies and lawmakers.
Feud over Problematic Clause SAB 121 in Crypto Bill
Recently, the U.S. Senate has voted with bipartisan support to repeal Staff Accounting Bulletin 121 (SAB 121), a controversial guideline issued by SEC in the FIT21 Bill, which involves the regulation of banks’ cryptocurrency activities. This repeal received 60 votes from members of both Democrats and Republicans and shows widespread dissatisfaction with the SEC proposal.
What is SAB 121?
Staff Accounting Bulletin No. 121 (SAB 121), issued by the U.S. Securities and Exchange Commission (SEC) on March 31, 2022, focuses on the accounting responsibilities of entities (like banks or exchanges) that safeguard crypto-assets for their customers.
SAB 121 includes any entity that stores or holds crypto-assets on behalf of others
(directly or through an agent) and is particularly relevant due to the unique risks—technological, legal, and regulatory—related to crypto-assets.
Under SAB 121, if an entity is responsible for safeguarding crypto-assets for others, it must declare both a liability and a corresponding asset on its balance sheet. This will be measured at the fair value of the crypto-assets held. Such an approach aims to provide clear information about the risks involved in safeguarding crypto-assets to investors and other stakeholders, enhancing transparency in financial reporting.
The Bulletin outlines that entities must evaluate whether they control the crypto-assets to determine if they fall under the scope of SAB 121.
As per the SAB121 guidelines, entities that do not control the crypto-assets but are obligated to safeguard them must record the fair value of these assets and the associated liabilities. This accounting treatment reflects the entity’s obligation and exposure to risks like theft, loss, or cybersecurity breaches. The application of SAB 121 is mandated for all entities that file financial information with the SEC under U.S. GAAP or International Financial Reporting Standards.
What is the opposition to SAB 121?
Opponents of SAB 121 argue that the rule unfairly restricts consumers by limiting banks’ involvement with digital assets. With Congress showing clear support for the repeal, all eyes are now on President Biden to see if he will approve the legislation.
Senator Cynthia Lummis commented that this vote against the SEC proposal highlights the need for financial innovation and suggests that the Biden administration reconsider its current regulatory approach under SEC Chair Gary Gensler.
The issue has garnered considerable attention, particularly among young voters actively engaged in cryptocurrency, who tend to oppose candidates who are against cryptocurrency initiatives.
A poll by the Digital Currency Group found that 48% of voters in swing states would not support anti-crypto candidates, highlighting the growing political influence of crypto supporters.
Additional Provisions of FIT21 Act
While the CFTC’s designation is a central piece of the FIT21 Act, the legislation goes further.
The FIT21 Act establishes safeguards for investors, including requiring minimum capital standards for crypto businesses, ensuring transparent risk disclosure practices, and outlining protocols for handling customer funds in case of bankruptcy. These measures aim to protect consumers from potential fraud and financial losses.
Why are Lawmakers upset with the SEC over Crypto?
The tussle between U.S. lawmakers and the SEC over the regulatory framework for cryptocurrencies centres on disagreements regarding the latter’s approach to regulate crypto space.
Many U.S. lawmakers have criticised the SEC, led by Chair Gary Gensler, for choosing a path of enforcement actions rather than creating a clear regulatory framework through formal rulemaking.
Lawmakers, including Representatives Mike Flood, Wiley Nickel, and Senator Cynthia Lummis, have proposed a resolution to repeal SAB 121. They have argued that it hampers the ability of regulated banks to safely handle digital assets and treats them differently from other assets.
In the larger context, the feud is a call from lawmakers for the SEC to consider legislative solutions over enforcement to address regulatory issues in the digital asset space.
Representatives French Hill and Dusty Johnson have highlighted the need for a statutory framework that would allow firms to enter the regulatory framework and comply with consumer protections.
Additionally, during a Senate Banking Committee hearing, Senator Tim Scott highlighted the lack of action from the SEC in preventing major bankruptcies in the crypto industry, questioning if the SEC had been “asleep at the wheel.” There is a call for the SEC to present before Congress to discuss these issues more thoroughly.
Why are Lawmakers Supporting the Crypto Industry?
U.S. lawmakers are actively supporting cryptocurrency businesses by pushing back against what they view as the SEC’s highly strict regulatory approach. They are advocating for a legislative framework rather than relying on enforcement actions. The lawmakers are also fighting for greater autonomy for the people of America when it comes to handling their individual finance.
However, learning about crypto trading has become easier through TRADE GPT 3.0 PLIX now as it serves as a reliable trading resource. This can be especially helpful for those new to the crypto space who are looking for guidance in navigating the complexities of the market.
Representatives like French Hill and Dusty Johnson have argued that legislation would better prevent future collapses of digital asset firms than enforcement actions by federal agencies. They suggest that a clear legislative framework would allow firms to comply proactively with regulations, ensuring consumer protection and industry stability.
Similarly, other lawmakers, including Mike Flood, Wiley Nickel, and Senator Cynthia Lummis, have introduced resolutions to repeal specific SEC regulations such as Staff Accounting Bulletin 121 (SAB 121).
Senator Tim Scott has voiced concerns about the SEC’s lack of preemptive actions to prevent major bankruptcies in the crypto space. He has called for SEC Chair Gary Gensler to testify before Congress to address these issues and ensure that the SEC is actively working to protect investors while fostering an environment conducive to innovation.
Why are Democrats And Republicans Supporting Crypto?
In a rare show of unity, both Democratic party and Republican Party have showcased their support for crypto businesses. A prominent case of bipartisan support in the U.S. Congress for the crypto community is the introduction and backing of the “Financial Innovation and Technology for the 21st Century Act” (FIT 21 Act) and the “Blockchain Regulatory Certainty Act”.
FIT21 Act has received broad bipartisan support and was approved by the House Financial Services Committee with a significant majority. It aims to establish clear rules for crypto firms about when to register with CFTC and SEC which is crucial for providing market certainty and protecting consumers while fostering innovation within the U.S.
Moreover, US lawmakers have introduced another Blockchain Regulatory Certainty Act to provide guidelines that exempt certain blockchain service providers like miners and multisignature providers from being considered money transmitters.
This clarification is vital for reducing regulatory hurdles and supporting the infrastructure of the digital asset economy. The passage of this act through the committee was seen as a significant bipartisan win for the crypto industry.
Both actions show that members of both major U.S. political parties are working together to create rules related to crypto that help the blockchain and cryptocurrency industries grow and stay secure.
What is President Biden’s Stance on Crypto?
President Joe Biden’s stance on cryptocurrency is mostly focused on ensuring responsible growth and use of digital assets while addressing potential risks associated with them.
Biden’s administration issued an Executive Order on “Ensuring Responsible Development of Digital Assets” which highlights a comprehensive approach for the U.S. government to regulate and support the crypto industry.
The Biden administration aims to protect U.S. consumers, investors, and businesses by directing federal agencies to assess and mitigate risks presented by the growing digital asset sector. This includes developing policy recommendations to address the implications of digital assets and ensuring that there is sufficient oversight to prevent systemic financial risks.
The order emphasises the importance of maintaining U.S. and global financial stability by identifying and mitigating financial risks that could arise from digital assets. This includes instructions for the Financial Stability Oversight Council to develop policies addressing these risks.
The administration is focused on curbing the illicit use of digital assets, including money laundering and financing of terrorism. This involves coordinated action across U.S. government agencies and with international partners to ensure robust frameworks and responses to these risks.
The Financial Innovation and Technology for the 21st Century Act (FIT21), which seeks to establish a regulatory framework for digital assets in the U.S., is expected to come to a vote in the U.S. Congress before the end of May 2024. The bill has already passed through the necessary committee stages and is now ready for a full House vote.
