Senate votes to overturn SEC rule preventing highly regulated financial firms from custodying digital assets

In a decision that received bipartisan support, the Senate aligned with the House of Representatives in voting to overturn controversial SAB-121 rule on Thursday.

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Senate votes to repeal SAB-121

The SEC issued Staff Accounting Bulletin 121 (SAB-121) in 2022, requiring a firm that custodies crypto assets for clients to record them as liabilities on its own balance sheet. The rule was met with backlash from several crypto industry leaders, who considered it would have several implications for banks working with crypto clients.

Several lawmakers also criticized the SEC for issuing the bulletin, which the Government Accountability Office believed met the definition of a rule and, as such, is subject to the Congressional Review Act  which allows Congress to review federal rules.

As a result, in an effort largely spearheaded by Republicans and a few Democrats, Congress swung into action to repeal SAB-121 based on the CRA.

A report from the Congressional Research Service on Wednesday stated, "If the SEC were to reissue the bulletin, provided that it met the CRA's definition of rule, Congress could again use the CRA to overturn the bulletin on the basis that it was too similar to the disapproved SAB-121 (or for any other reason). Congress could also use its legislative powers in other ways, not just through the CRA, to respond to any subsequent SEC bulletin or other action."

Also read: SEC Chair “knowingly misled” Congress over Ethereum status, House's McHenry says

The House of Representatives voted last week to overturn SAB-121 in a resolution that was passed with support from 228 members as opposed to 182 members against it. However, the number of votes isn't enough to make the decision veto-proof.

Similarly, the Senate voted 60-38 on Thursday to repeal the policy. 12 Democrats, including Senate Majority Leader Chuck Schumer, joined 48 Republicans to vote against the SEC's move. However, it also fell short of the threshold to override a veto from the President.

Speaking on SEC Chair Gary Gensler's refusal to revisit SAB-121 after criticism from lawmakers, Senator Cynthia Lummis said, "Maybe it's because he's committed to an ill-informed and unworkable fight against the digital asset industry at any cost. Unfortunately, SAB-121 does nothing to protect consumers."

Read more: US Senators raise grave concerns over DOJ's policies towards cryptocurrency asset providers

She also stated in an X post:

Despite the overturn of SAB-121 seeming like a victory for the crypto industry, it is expected that US President Joe Biden would veto the decision of Congress, according to a White House statement. The statement said such a decision "could also inappropriately constrain the SEC's ability to ensure appropriate guardrails and address future issues related to crypto-assets including financial stability."