The Government Accountability Office said guidance from the Securities and Exchange Commission on how firms should account for holding crypto needs to, by law, go in front of Congress before it can become effective.

The SEC’s Staff Accounting Bulletin No. 121, or SAB 121, was issued in March 2022 and requires firms that custody crypto to record customer crypto holdings as liabilities on their balance sheets.

The bulletin is subject to the Congressional Review Act, which requires that before a rule can go into effect, agencies have to submit a report on the rule to Congress, the congressional watchdog said on Tuesday. The CRA, enacted in 1996, aims to bolster congressional oversight of agency rulemaking.

Congress would then have the ability to review and disapprove the rules over a 60 day stretch, according to the GAO.

“We conclude the Bulletin is a rule for purposes of CRA because it meets the APA [Administrative Procedures Act] definition of a rule, and no exceptions apply. Therefore, the Bulletin is subject to the requirement that it be submitted to Congress,” GAO said on Tuesday.

The SEC said the bulletin was not subject to the CRA because it didn’t meet the definition of a rule, according to the GAO.

Crypto pushback

The bulletin has received some pushback from crypto advocates. Crypto-friendly SEC Commissioner Hester Peirce wrote in March that staff had decided, that because of crypto-specific risks, companies should record those crypto assets as liabilities.

“The SAB, as a staff statement, is not enforceable, but much of the language in the document reads as if it is. For example, SAB 121 tells affected companies they do not have to issue a restatement and gives them a transition period so that they do not have to apply the guidance immediately,” Peirce said.

A group of bipartisan lawmakers introduced a bill last month that would block federal agencies from “requiring certain institutions to include assets held in custody as a liability,” in response to the SEC’s bulletin.

“Custodial assets should not be listed as a liability on a balance sheet or have an additional capital requirement, simply because they are digital assets,” said Rep. Ritchie Torres, D-N.Y., in a statement.

Response from crypto industry

Cody Carbone, vice president of policy at the Chamber of Digital Commerce, accused the SEC of gaslighting the GAO in a post on X.

This is a blow to the SEC and a win for clear, fair custody rules for digital assets. Time will now tell whether Congress moves to disapprove this rulemaking,” Carbone said.

Jake Chervinsky, chief legal officer at venture fund Variant, said the SEC should “immediately withdraw SAB 121,” according to a post on X.

“This is a clear statement from a federal agency that the SEC broke the law,” Chervinsky said.

The SEC did not immediately respond to a request for comment.

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