Congress, The SEC, and SAB (Stupid Accounting Bulletin) 121

Well, it’s Triple Entry Day…again. (That’s our belated reference to our favorite U.S. holiday)

If you’re new here, this is Triple Entry 2.0 - a fast-and-furious rip through the most important news in web3 accounting and finance. Get in, get out, get back to busy season! Don’t let us distract ya.

WHAT’S HERE?! ??

• ?? How the SEC blundered so hard that Congress is stepping in to fix it
• ?? An exciting alliance to revolutionize digital asset compliance (hey, that rhymed!)
• ?? Moves from other places in the US government to convince the world that crypto is dangerous, bad, and/or uncool

Let’s get after it.

The Main Entry: U.S. Lawmakers Seek to Overturn SAB (Stupid Accounting Bulletin) 121?

What happened:?

Well, the TL;DR is that the SEC messed up–again, and, thankfully, members of Congress are actually trying to do something about it.

This time,??

Last week, Senator Cynthia Lummis alongside Representatives Wiley Nickel and Mike Flood launched a bipartisan offensive. They unveiled resolutions in both the Senate and House, aiming to give the thumbs down to the contentious accounting rule, effectively stripping it of any legal clout.

SAB 121 background and why it matters:

Back in March 2022, the SEC decided to shake things up with SAB 121 – not to be confused with a SAAB – possibly the ugliest automobile ever created:

This little number applies to all entities that file financial information with the SEC under U.S. GAAP or IFRS and that have a safeguarding obligation for crypto assets.?

SAB 121 insists that the safeguarding entity must recognize a liability on its balance sheet and a corresponding asset under ASC 805 , Business Combinations. Ok, so what’s the issue?

This is a big deal because, if you're a bank that offers Bitcoin custody on behalf of customers, SAB 121 wants you to act as if those Bitcoins are yours, padding your vault with extra cash to back it up. This rule is especially asinine when you consider how this flips the script on traditional asset custody. Take State Street, for example, sitting on a mountain of over $40 trillion in customer assets. Imagine them having to list all that on their own balance sheet. Utterly nonsensical.

Responses to SAB 121:

As you can imagine, the industry did not take kindly to SAB 121. Here are a few of the most notable responses:

• Anchorage Digital : “Lastly, it is already well established that SAB 121-compliant banks cannot scale the digital asset custody offerings due to knock-on capital costs associated with putting custodied digital assets on their balance sheets. 4 This is because these banks have to hold 500 bps in tier 1 capital for any digital assets they hold on their balance sheets, despite their estimated returns for custodying digital assets amounting between 5-50 bps. This makes it unprofitable for banks subject to SAB 121 to custody digital assets.”
• BNY Mellon: “banks cannot practically serve as qualified custodians for digital assets in any sufficient scale if they are still subject to the threshold limitations of SAB 121…”
• SEC Commissioner Hester Peirce: “..yet another manifestation of the Securities and Exchange Commission’s scattershot and inefficient approach to crypto.”
• Hal Scott and John Gulliver (Harvard Law School): “That is a big problem because the largest and most sophisticated custodians in the world are all banks or broker-dealers affiliated with banks. The new SEC accounting rule prevents firms such as State Street and BNY Mellon, which custody trillions in financial assets, from custodying crypto assets.”

• Rep. Mike Flood (R-Nebraska): sent a letter to Gensler probing why SAB 121 conflicts with previous Office of The Comptroller of Currency (OCC) guidance:?

And, perhaps most importantly, the Government Accountability Office conducted a comprehensive review and issued a finding saying that the SEC messed up when it didn’t send SAB 121 to Congress, as it should with an official rule.?

So, now members of Congress are getting involved saying, “Yo, SEC, you guys can’t just make laws that impact entire industries by way of accounting bulletin.”?

Now what??

What's the next step in this process? The Congressional Review Act (CRA) allows Congress to review new regulations from federal agencies within a 60-day review period (if rule not submitted, its 60 days from GAO opinion).?

Should Congress find themselves at odds with a new rule, they have the power to pass a resolution of disapproval. This is essentially Congress's way of vetoing a rule, but it needs the President's signature to make it official. Getting rid of a rule in this manner doesn't just stop it from going into effect; it also prevents the agency from issuing a similar rule in the future unless Congress explicitly gives the green light.

The process for passing a resolution of disapproval is relatively straightforward—it only requires a simple majority in both the House and the Senate – so, the Senate only needs 51 votes, not 60.?

Keep an eye on this one, folks, because if the rule is struck down, we may see banks start offering crypto custody.?

Spotlight ?? - Uniting Expertise and Execution: RSM and Bitwave To Revolutionize Financial Compliance for Digital Assets

Bitwave recently announced a ground-breaking strategic alliance with RSM, a global leader in assurance, tax, and consulting services. This alliance is set to revolutionize financial compliance for middle-market businesses with optimized digital asset operations, comprehensive compliance assurance, and streamlined risk mitigation.

To find out more about simplifying digital asset compliance with RSM and Bitwave,?GO HERE.

The Water Cooler ??

Things (STILL) worth talking about at the office water cooler…if you 1) talk to people, 2) still work in an office, and 3) have a water cooler.

Other Significant Findings 2.0

Check it out - three more stories of interest hand-picked for YOU, aka a thought leader in crypto accounting and finance. Can we do it in 100 words (or less)? Test us.?

• Ripple vs. SEC update - Ripple to turn over financial statements :?The SEC won a crucial motion in its case against Ripple, with Judge Sarah Netburn ordering Ripple to disclose its financial statements for 2022-2023, post-complaint contracts, and institutional XRP sales proceeds. This decision, despite Ripple's objections, sets a February 12 deadline for discovery related to potential remedies. The legal battle stems from the SEC's 2020 allegations of an unregistered securities offering by Ripple Labs. This ruling marks a significant step forward for the SEC, potentially shaping regulatory standards in the cryptocurrency market.

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• Biden Admin’s Bitcoin Mining Energy “Emergency” :?Move over, “illegal activity :” energy use is the Bitcoin boogeyman?du jour. The Energy Information Administration (EIA) plans to survey electricity use among selected U.S. Bitcoin miners over six months, citing concerns about the impact on energy consumption from a pricing-rally-induced mining surge. While the EIA itself claims policy-neutrality, that doesn’t mean this survey wouldn’t impact policy; the language of an “emergency” from the Biden admin suggests this survey may be some good ol’ confirmation-bias hunting. Yes, it fits neatly with the administration's focus on reducing the country's carbon footprint but let’s not forget the admin’s less-than-favorable stance toward the crypto industry in general.
• Janet Yellen be Yellin’ : US Treasury Secretary Yellen is set to testify (yell?) before Congress about potential hazards to the financial system posed by the crypto industry, including risks associated with stablecoins, platform runs, and price volatility. The testimony, part of an update on the Financial Stability Oversight Council's (FSOC) work, highlights the council's focus on addressing crypto risks to prevent future financial crises. Yellen emphasizes the need for enforcement of existing regulations and urges Congress to pass legislation for regulating stablecoins and non-securities crypto-assets.

Extraordinary Items 2.0 ??

FYI we will absolutely be spamming you with crypto tax memes from now until Tax Day. Brace yourself.

What do you think of the new improved Triple Entry??Hit reply and let us know what you found most helpful this week—we’d love to hear from you!

“Calc”-you-later, ???

Trevor