Patrick McHenry

US lawmakers argue SEC accounting policy places crypto customers at risk

While the bulletin was intended to provide clarity regarding the accounting treatment for digital assets, it has been criticized by both lawmakers and regulators.

Two United States lawmakers have criticized crypto accounting guidelines outlined by the national securities regulator, arguing they places crypto customers at greater risk of loss.

The guidelines came from the United States Securities and Exchange Commission and became effective in April last year.

The guidelines ask financial companies holding crypto for customers to recognize all digital assets they do not control as a liability. They also state that digital assets should be backed by a safeguarding asset.

However, Senator Cynthia Lummis and Representative Patrick McHenry argued on March 2 that these guidelines will “likely” discourage regulated entities from engaging in digital asset custody, which is the opposite effect of what the regulator should be doing. 

In a letter to ranking individuals with the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Administration, the lawmakers argued that while Staff Accounting Bulletin (SAB) 121 was intended to provide clarity on accounting treatment for digital assets, it carried negative side effects. They wrote:

“SAB 121 places customer assets at greater risk of loss if a custodian becomes insolvent or enters receivership, violating the SEC’s fundamental mission to protect customers.”

The lawmakers argue the effect of SAB 121 will be to “deny millions of Americans access to safe and secure custodial arrangements for digital assets.”

The lawmakers also disagreed with the “breadth of the ‘digital asset’ definition in SAB 121,” arguing that “a more nuanced hierarchy for this asset class which considers the opportunities and risks of digital assets with different functions is necessary.”

Related: SEC chair implies crypto exchanges may not be ‘qualified custodians’ as new rule is drafted

Lawmakers including Lummis have kicked up a fuss over the SEC accounting bulletin in the past.

Last year, five Republican senators, including Lummis, sent a letter to the SEC on June 16, sharing their concern that the bulletin amounted to “regulation disguised as staff guidance” and did not adhere to the Administrative Procedure Act.

SEC commissioner Hester Peirce shared similar concerns on March 31, soon after the bulletin was released, noting it was “the way the change is being made” rather than the accounting determination itself she took issue with. She characterized the change as:

“Yet another manifestation of the Securities and Exchange Commission’s scattershot and inefficient approach to crypto.”

New House Financial Services Committee chair wants to delay crypto tax changes

U.S. Republican Representative Patrick McHenry called for clarification on a “poorly” written digital asset tax provision in a letter to the Treasury.

The incoming United States House Financial Services Committee chair, Patrick McHenry, wants the Treasury to delay implementing a section of the Infrastructure Investment and Jobs Act that deals with digital assets and tax collection.

McHenry sent a letter on Dec. 14 to U.S. Treasury Secretary Janet Yellen with questions and concerns about the scope of Section 80603 of the act. In the letter, he requested clarification over the “poorly drafted” and potentially privacy-compromising section that deals with the taxation of digital assets, scheduled to go into effect next year.

He said the section requires the government to treat digital assets as the equivalent of cash for tax purposes, which could “jeopardize” the privacy of Americans and hamp innovation.

The section, called “Information Reporting for Brokers and Digital Assets,” requires brokers to report certain information relating to dealing with digital assets to the Internal Revenue Service (IRS).

McHenry argues the section has been drafted badly and that the term “brokers” could be “wrongly interpreted” as applying to a wider range of people and companies than intended.

The Act contains a provision requiring individuals or entities engaging in a trade or business to report to the IRS any digital asset transactions that exceed $10,000.

The requirement was challenged earlier this year by Coin Center, a nonprofit advocacy group focused on blockchain technology, which filed a lawsuit against the Treasury arguing that the rule will impose a “mass surveillance” regime on U.S. citizens.

Related: Sens. Warren and Marshall introduce new money-laundering legislation for crypto

According to Fordham International Law Journal, the section is likely to impose reporting requirements on the major cryptocurrency exchanges that already have user information, including customers’ names, addresses and social security numbers.

McHenry acknowledged it was a positive step forward to see the Treasury Department state that “ancillary parties” should not be subject to the same reporting requirements as brokers.

In February, U.S. Senator Rob Portman tweeted a letter from U.S. Assistant Secretary for Legislative Affairs Jonathan Davies that clarified that parties such as crypto miners and stakers are not subject to the new legislation.

McHenry’s letter concluded by requesting the Treasury “immediately” publish the rules under the section and delay its effective date to give market participants time to comply with any new requirements.

It’s the second letter McHenry has sent to Yellen this year, having sent her a letter on Jan. 26 urging the Treasury secretary to clarify the definition of a broker.