Biden Administration Nears Key Win in Cryptocurrency Regulation Battle
The Biden administration is poised for a significant victory in its effort to tighten regulation on cryptocurrency. A resolution aiming to remove barriers preventing traditional investment banks from holding digital assets is unlikely to gather the necessary support in the House of Representatives to override President Biden’s veto. This development marks a crucial moment in the ongoing debate over cryptocurrency regulation and the role of traditional financial institutions in the digital asset space.
The Battle Over SAB 121
At the center of this controversy is SAB 121, an accounting bulletin issued by the SEC staff, which effectively restricts banks from acting as custodians for cryptocurrencies. The resolution to repeal SAB 121, embodied in H.J. Res.109, will not garner the two-thirds majority required to overturn Biden’s veto, sources familiar with the vote have revealed. This setback underscores the administration’s stance on maintaining stringent regulatory measures for digital assets.
The initial support for rescinding SAB 121 saw both the House and Senate passing the resolution by simple majority. However, the veto in May by President Biden has thrown a wrench into the plans of those advocating for less restrictive crypto regulations. Approximately 60 members would need to shift their votes to challenge Biden’s position, a scenario deemed improbable by House leaders.
Political Dynamics and Crypto Regulation
Cryptocurrency regulation has evolved into a politically charged issue, particularly with the approach of the November elections. GOP presidential candidate Donald Trump has been actively courting crypto investors, positioning them as a pivotal voting bloc. Reflecting this strategy, the Republican National Committee has incorporated cryptocurrency issues into its 2024 platform, pledging to “end Democrats’ unlawful and un-American crypto crackdown.”
Despite hopes within the crypto community that recent political turmoil in the Democratic Party might lead to a shift in stance, many Democrats are reluctant to further weaken the president. According to sources on Capitol Hill, many Congressional Democrats in tight races are choosing not to oppose Biden’s veto.
The Debate Over Regulatory Overreach
Critics of SAB 121, such as top Republican Patrick McHenry (R-NC), argue that the SEC has overstepped its authority by enforcing the bulletin as if it were a formal rule. McHenry has labeled SAB 121 as “one of the most glaring examples of regulatory overreach” by SEC Chairman Gary Gensler, arguing that it unfairly restricts financial institutions from acting as custodians of digital assets.
Traditional accounting practices allow banks to manage risk by holding financial assets off their balance sheets. SAB 121, however, suggests that due to the unique risks associated with cryptocurrencies, banks should record these assets as both an asset and a liability. This approach significantly increases compliance costs and disincentivizes banks from holding digital assets for customers or ETF providers.
Industry Concerns and Concentration Risks
The stringent rules of SAB 121 have concentrated crypto custody within a few platforms, notably Coinbase. As the primary custodian for the majority of bitcoin and ether ETFs, any issues faced by Coinbase could have widespread repercussions across the industry. This concentration risk is a significant concern for major Wall Street players like BlackRock and VanEck, which have highlighted the potential systemic risks in recent SEC filings.
Industry experts argue that allowing banks to custody digital assets could mitigate these risks and enhance the competitiveness of the U.S. financial sector. Matthew Sigel, VanEck’s Head of Digital Assets Research, criticized the current regulatory environment, stating that it contributes to “needless concentration risk” and hampers U.S. competitiveness.
Looking Ahead
Despite the apparent setback, efforts to modify or overturn SAB 121 continue. House leadership is exploring alternative legislative avenues, including the Uniform Treatment of Custodial Assets Act, introduced by Rep. Mike Flood (R-NE). This bipartisan bill aims to enable banks, credit unions, and trusts to more easily safeguard digital assets, potentially providing a long-term solution to the issues posed by SAB 121.
Conclusion
The Biden administration’s stance on cryptocurrency regulation, particularly through measures like SAB 121, reflects a cautious approach aimed at protecting consumers and investors. While the current political climate makes it unlikely that President Biden’s veto will be overridden, the debate over how best to regulate digital assets and integrate them into the traditional financial system is far from over. As the landscape of cryptocurrency continues to evolve, the balance between innovation and regulation will remain a critical issue for policymakers and industry stakeholders alike.
