SEC’s Gensler faces scrutiny on crypto custody guidance in House hearing.

SEC's Gensler faces scrutiny on crypto custody guidance in House hearing.

The SEC Criticisms and the Implications for the Blockchain Industry

SEC chair Gary Gensler testifying before the House Financial Services Committee

The recent hearing of the House Financial Services Committee saw Gary Gensler, chairman of the United States Securities and Exchange Commission (SEC), facing criticism from Representative Mike Flood and other committee members regarding the SEC’s policies and actions. Though the hearing covered a wide range of topics, one of the focal points was the SEC’s Staff Accounting Bulletin (SAB) 121, issued in March 2022. This bulletin addressed the accounting and disclosure of crypto assets held by public companies, including banks and platforms like Robinhood and Coinbase.

During the hearing, Flood revealed that the SEC did not consult with prudential regulators or the Financial Accounting Standards Board (FASB) before publishing SAB 121. In fact, Flood pointed out that the FASB had only added digital assets accounting standards to its agenda in May 2022, after the publication of the bulletin. This revelation raised concerns about the justification behind the SEC’s decision to issue the guidance.

Gensler argued that SAB 121 was intended to provide guidance on applying existing SEC rules. He cited a 2009 rule on the custody of digital assets by investment advisers and the finalized rule on special purpose broker-dealers from April 2021. However, Flood contested this claim, stating that there were no SEC rules specifically addressing the custody of digital assets. He further emphasized that a rulemaking on custody, including digital asset custody, had only been proposed in February 2023 and had not yet been finalized.

The discrepancy between Gensler’s explanation and Flood’s assertion prompted questions about the SEC’s motives for issuing the bulletin. Flood suggested that the SEC either knew there was weak justification for issuing the guidance or made an error in doing so. This controversy not only undermines the legitimacy of SAB 121 but also raises questions about the SEC’s decision-making process regarding crypto assets.

SAB 121 requires public companies to disclose the technological, legal, and regulatory risks associated with the custody of digital assets. However, it faced opposition from the start. SEC Commissioner Hester Peirce released a critical response to the bulletin on the day of its issuance. Additionally, five senators, including crypto advocate Cynthia Lummis, sent a letter to Gensler in June, arguing that the SAB was “regulation disguised as staff guidance” and placed crypto holders at greater risk.

In a separate letter, Flood, Wiley Nickel, Tom Emmer, and Ritchie Torres, members of the Financial Services Committee, called on Gensler to approve spot Bitcoin exchange-traded funds. Although this topic was not heavily discussed during the hearing, it reflects the broader concerns and demands within the blockchain industry for more regulatory clarity and opportunities for investment.

The criticisms directed towards the SEC and its policies have significant implications for the blockchain industry. At the heart of the issue lies the need for clear and consistent regulations that foster innovation and protect investors. The SEC’s actions and decisions play a crucial role in shaping the regulatory landscape for blockchain and cryptocurrencies, impacting everything from initial coin offerings (ICOs) to decentralized finance (DeFi) platforms.

The controversy surrounding SAB 121 highlights the challenges in developing accounting and disclosure standards for digital assets. The lack of alignment between the SEC and the FASB, as well as the ambiguity surrounding existing rules, create a regulatory environment that is both uncertain and riddled with potential inconsistencies.

To ensure the successful integration of blockchain technology into the mainstream financial ecosystem, it is essential for regulatory bodies like the SEC to collaborate with prudential regulators, industry experts, and standard-setting organizations. Such collaboration would enable the development of comprehensive and effective guidelines that address the unique characteristics and challenges of digital assets.

In conclusion, the criticisms faced by the SEC and its policies during the recent hearing shed light on the complexities of regulating the blockchain industry. The controversy surrounding SAB 121 serves as a reminder of the importance of clear and consistent regulations that provide a supportive environment for innovation while safeguarding investors. Moving forward, it is crucial for regulators to engage in comprehensive dialogue with industry stakeholders to develop robust and coherent guidelines. Only through such collaborative efforts can the blockchain industry reach its full potential and contribute to the transformation of the global financial landscape.

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