U.S. House expected to uphold Biden veto preserving SEC accounting rule

The Biden Administration is on the verge of securing an important victory in its crackdown on cryptocurrency.

A resolution that would remove regulatory roadblocks for traditional investment banks looking to hold digital assets is unlikely to get enough votes in the House of Representatives to overturn President Biden’s veto when it goes back for a vote on Wednesday, FOX Business has learned.

People with direct knowledge of the vote say the resolution to repeal SAB 121, an accounting bulletin issued by the staff of the Securities and Exchange Commission that largely prohibits banks from keeping custody of crypto, will not muster the necessary two thirds majority in the House to override Biden’s veto of the joint resolution known as H.J. Res.109.

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Roughly 60 members would need to change their votes to go against Biden, a scenario that House leaders believe is unlikely. Both the House and Senate, through simple majority, voted in favor of rescinding SAB 121 before the president’s veto in May. 

Some crypto investors say they plan to watch the vote closely on Wednesday afternoon to see which Democrats double down on what they see as an anti-crypto position. 

The issue of cryptocurrency regulation has become increasingly political in recent months as GOP presidential candidate Donald Trump has been courting crypto investors as a potentially important voting bloc in the November election. The Republican National Committee, reflecting Trump’s position, recently integrated cryptocurrency issues into its 2024 platform, vowing to “end Democrats’ unlawful and un-American crypto crackdown.”

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Some in the crypto world were hopeful that the recent turmoil in the Democratic Party following Biden’s disastrous performance in the first presidential debate, which has resulted in prominent party members calling for his resignation, would cause some Congressional Democrats in tight races to pivot to help override Biden’s veto of H.J. Res.109.

But the opposite seems to be the case, with Democrats not seeking to further weaken the president, according to sources on Capitol Hill.

“There are so many Democrats piling on Biden already and a lot of members don’t want to add to that,” a House staffer who wished to remain anonymous told FOX Business.

“I think if the veto were to get overturned right now, then Biden is toast,” another staffer said.

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The controversy surrounding SAB 121 is that it’s being enforced in the same way as an official rule adopted by the full SEC Commission, and not merely guidance issued by agency staff. Top Republicans like Patrick McHenry (R-NC) say the SEC was able to bypass Congress and other regulators by deeming SAB 121 “guidance”, which does not have to go through traditional rulemaking procedures such as a public comment period. McHenry called SAB 121 “one of the most glaring examples of regulatory overreach” by SEC Chairman Gary Gensler that prevents highly regulated financial institutions and firms from acting as custodians of digital assets.

Conventional accounting rules allow banks to hold traditional financial assets off their balance sheets to help manage risk and keep the cost of borrowing down. The SEC staff guidance suggests that because of risky factors in crypto that are not present with traditional assets (like hacking capabilities), banks should record crypto as both an asset and a liability, which ultimately increases the cost of compliance, giving them little incentive to hold digital assets in custody for customers who want to trade in crypto or for Exchange Traded Fund providers creating portfolios.

Gensler has called the $2 trillion crypto market the “wild west” of investing, citing various scandals that have impacted investors over the years.

In his letter to Congress that accompanied the veto of H.J. Res.109, Biden echoed Gensler, saying he did not want to “jeopardize the well-being of consumers and investors”, by getting rid of guardrails that are “necessary to harness the potential benefits and opportunities of crypto-asset innovation.”

But industry participants say SAB 121 may put investors in harm’s way by allowing a concentration of risk inside the small number of platforms that currently custody digital assets.

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Coinbase, the U.S.’s largest crypto exchange, is not federally regulated but was the custodian of choice for all six of the proposed spot ether ETFs that are set to launch in the coming weeks and eight of the eleven spot bitcoin ETFs that began trading in January. According to Coinbase CEO Brian Armstrong, Coinbase holds about 90% of the $36 billion in bitcoin ETF assets.

Recent SEC filings show that major Wall Street players like BlackRock and VanEck, which both have bitcoin and ether ETFs, are concerned about the risk that comes with a single entity having custody of assets across competing products. Both firms note that if Coinbase were to encounter a problem, the effect would be felt on an industry-wide basis.

This issue, industry participants say, is due largely to banks being sidelined by the restrictive rules of SAB 121. 

“The president and members of Congress who vote to keep SAB 121 are contributing to needless concentration risk and harming U.S. competitiveness,” said Matthew Sigel, VanEck’s Head of Digital Assets Research.

Even SEC commissioners, who lead the agency in its mission to protect investors, have criticized SAB 121 for its adverse effects on consumers. 

GOP Commissioner Hester Peirce blasted the guidance, calling it a “pernicious weed,” while urging her fellow commissioners to adopt a more open approach to engagement with digital assets. Her GOP counterpart, Commissioner Mark Uyeda, told FOX Business in June that SAB 121 ought to be withdrawn.

Members of Congress are also voicing concerns ahead of Wednesday’s vote that SAB 121 poses a risk to the safety of customers’ digital assets. Democrat Congressman Wiley Nickel (D-NC) raised the issue at a House Financial Services Committee hearing on Tuesday with Treasury Secretary Janet Yellen.

“I want to echo Congressman Flood’s concerns about the concentration risk in the market for crypto custody due to the SEC’s misguided SAB 121 which makes crypto less safe for consumers,” Nickel said. “We have the best banks in the world, and they ought to be able to take care of this custodial banking piece.”

Meanwhile, House leadership is looking at other ways they can get rid of SAB 121, including a bill that was introduced in September by Rep. Mike Flood (R-NE) called the Uniform Treatment of Custodial Assets Act. The bipartisan bill, co-sponsored by Reps. Ritchie Torres (D-NY), Wiley Nickel (D-NC), and French Hill (R-AR) would make it possible for banks, credit unions and trusts to easily safeguard digital assets.