SEC’s Controversial Rule SAB 121 Sparks Debate in Finance Industry and Crypto Community

The U.S. Securities and Exchange Commission (SEC) proposed a little-known rule, known as SAB 121, that requires digital asset custodians to treat the assets they hold for clients as a liability on their own balance sheets and hold additional capital to offset those liabilities since 2022. The rule has been heavily criticized by the finance industry and the crypto community alike, with major banking and securities industry bodies calling it “obscure” and “capital intensive.” Critics argue that the rule is unnecessary and onerous, and goes against existing accounting standards. In February 2024, Sen. Cynthia Lummis (R-Wyo.) and Reps. Wiley Nickel (D-N.C.) and Mike Flood (R-Neb.) proposed to revoke the rule, arguing that the SEC overstepped its bounds by issuing the rule without proper consultation with regulatory bodies or adherence to the required public review and comment periods. President Biden has threatened to veto any attempt to repeal the rule, indicating his support for SEC Chairman Gary Gensler. The House passed a resolution to repeal the rule, but it still needs to pass through the Senate before it becomes law. Critics argue that the rule is anticompetitive and could lead to a significant restructuring of the US financial system. However, supporters argue that it is necessary to ensure the safety and stability of the financial system in light of the risks associated with digital assets. The debate over SAB 121 highlights the ongoing tensions between traditional finance and emerging technologies like blockchain and digital currencies.