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Legislative Hot Topics in the World of Cryptocurrency and Digital Assets

By Theresa Raponi, Jess LeDonne, Mark Elsaesser, on June 27th, 2024

The digital asset and blockchain industry has been attracting significant attention from traditional finance, retail investors, and regulators. This surge in interest is primarily fueled by two major milestones: the U.S. Securities and Exchange Commission (SEC) approving both a spot bitcoin exchange-traded product (ETP) and an Ethereum ETP. For more details on bitcoin and Ethereum ETPs, see our related article here. Additionally, the long-awaited lawsuit between Ripple Labs (XRP) and the SEC, which began in December 2020, is expected to conclude soon. The outcome of this case will profoundly shape the industry’s future trajectory and its journey toward mainstream adoption, especially as Ripple aims to address challenges in cross-border payments, custody, and liquidity. A favorable resolution in the Ripple lawsuit would strongly signal that this formerly disregarded and stigmatized asset class is not only here to stay but also possesses far more resilience than initially perceived.

It appears evident that digital assets are currently in the regulatory phase of their adoption cycle. Therefore, we will explore two current hot topics on Capitol Hill: SAB121 and FIT21.

SAB121: Securities and Exchange Commission Staff Accounting Bulletin No. 121:

The crypto regulatory environment continues to face challenges, particularly highlighted by the controversies surrounding the SEC’s Staff Accounting Bulletin No. 121 (SAB121). In March 2022, the SEC introduced SAB 121, setting new accounting guidelines for crypto asset custodians. Since then, the bulletin, which mandates custodians to account for liabilities and offsets on their balance sheets, has faced opposition due to perceived overreach and deviation from established accounting standards. Critics argue that it inadequately reflects the custodians’ legal and economic responsibilities, potentially endangering consumer interests.

Last month, a bill (H.J. Res. 109) proposing to repeal SAB 121 passed in both the House and the Senate, but was then vetoed by President Biden on May 31st. In the President’s message regarding the veto he emphasizes investor protections, saying “My Administration will not support measures that jeopardize the well-being of consumers and investors. Appropriate guardrails that protect consumers and investors are necessary to harness the potential benefits and opportunities of crypto-asset innovation.” The Presidential veto underscores the ongoing debates about the regulation of digital assets and the need for unique regulatory frameworks accommodating cryptocurrencies and supporting the safe expansion of digital assets in the financial system.

U.S. Congressman Mike Flood, H.J. Res. 109’s sponsor expressed his disappointment in the veto but stated that it was “not the last word on SAB 121.” He went on, “digital assets and cryptocurrency are here to stay and are a critical part of America’s financial future. Banks have long been America’s most trusted custodians, and regulators should work with them so they can provide the same services for digital assets that they have to other asset classes for years.”

Of course, alternatives to bank custodians are being – and should be – considered. Self-custody of cryptocurrencies offers individuals unparalleled autonomy and security in managing their digital assets. Unlike traditional bank-based or third-party custody, self-custody means that individuals control their private keys, the crucial credentials for accessing and managing their cryptocurrencies. This direct control ensures that individuals can operate independently of financial institutions, mitigating risks associated with third-party mismanagement or security breaches. For example, hardware wallets enhance security by isolating the private keys from internet-connected devices, reducing the risk of hacks. Moreover, self-custody supports the fundamental principles of decentralization inherent in cryptocurrency philosophy—empowering users to manage their financial assets without intermediary oversight. This is certainly something regulators will be considering in the aftermath of the recent SAB 121 controversies.

FIT21: The Financial Innovation & Technology for the 21st Century Act:

Lastly, efforts are underway to establish a robust regulatory framework for digital assets aimed at combating fraud, safeguarding consumers, and enhancing consumer confidence. Recently, the Financial Innovation & Technology for the 21st Century Act (FIT21) enjoyed a strong bipartisan vote as it was passed in the House. FIT21 aims to clarify the regulatory framework governing the burgeoning crypto industry by delineating roles for the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). These two regulators have had differing opinions on the division of oversight and control responsibilities in this new and ever-evolving industry. The proposed legislation aims to resolve those disagreements by redesigning the regulatory framework and classifying digital assets into three categories (digital commodities, restricted digital assets, and permitted payment stablecoins) each overseen by different regulatory bodies. The hope by the bill’s supports is that this would reduce regulatory burdens, streamline compliance, and encourage industry growth.

As the upcoming elections near, the prospects of the bill progressing through the Senate appear slim. Should the bill reach the Senate floor, its provisions are likely to undergo modifications, necessitating a return to the House for further debate. The topic was a focal point of discussion at the recent Consensus conference in Austin, Texas, where Representative Patrick McHenry (R-N.C.), Chair of the Financial Services Committee, expressed optimism about the bill’s future. Despite the Biden administration’s opposition to the bill, a veto intention has not been explicitly stated, raising questions about the administration’s readiness to negotiate and resolve outstanding issues to enact policy. This ongoing discussion provides a measure of relief to industry stakeholders.

In conclusion, the developments discussed above reflect a dynamic period of advancement and contention in the realm of cryptocurrency and digital assets regulation, signaling critical shifts in both policy and market practices that will influence the broader financial landscape in the years to come.

If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Written By

Jessica LeDonne Image
Jess LeDonne
Director, Policy and Legislative Affairs
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Mark Elsaesser
Senior Accountant

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