The United States Congress has recently had a flurry of crypto action, with legislation passed which would overturn the US Securities and Exchanges Commission's (SEC) rule (also known as the SEC's Staff Accounting Bulletin No. 121, or SAB 121) and a new framework for crypto assets, the Financial Innovation and Technology for the 21st Century Act (FIT 21) proposed and passing the House this morning Australia time.
SAB121
SAB 121 is an administrative rule promulgated by the SEC which requires that businesses account for crypto on their balance sheet as an asset and a corresponding liability, effectively preventing highly regulated financial firms, such as banks, from providing custodial services to hold cryptocurrencies for clients, because banks must hold regulatory capital which is calculated with reference to their balance sheets and the volatile nature of crypto-assets means the regulatory capital management requirements are commercially impossible if crypto is held on balance sheet. Put another way, this accounting rule, if it applied to any other asset, would cause custody to be commercially impossible. The legislation passed with a resounding vote of 60 to 38, demonstrating strong bipartisan support with numerous democrats joining the vote.
Notwithstanding the majority vote in the Senate, the White House had made clear that if the bill comes across the desk of President Biden, it will be vetoed. Under the US Constitution, the President can veto a bill which has been passed by the House of Representatives and the Senate.
President Biden has until 28 May to enact his threatened veto, which can itself be overturned by a supermajority vote in the Senate (which is not likely to happen). Reporting is now suggesting that the President will not use his veto on this law.
Advocates for H.J.Res. 109 assert that overturning SAB 121 is vital for consumer protection. The SEC's recent approval of several spot Bitcoin ETFs, which are predominantly held by a few institutions, creates centralisation risks. H.J.Res. 109 aims to break these barriers, enabling more regulated institutions to custody Bitcoin for customers.
FIT21
In a parallel move, 60 crypto firms, including Coinbase, Kraken, and Andreessen Horowitz, have thrown their support behind FIT21. This bill seeks to establish a comprehensive regulatory framework for digital assets, shifting significant oversight responsibilities to the Commodity Futures Trading Commission (CFTC) and away from the SEC.
The bill also aims to modernise the regulatory landscape, making it more suitable for the technological advancements in the crypto space. These firms argue that current US securities laws, which were designed nearly a century ago, are not equipped to handle the speed and complexity of digital asset transactions and the regulation-by-enforcement approach of the SEC has been heavily criticised while there is no meaningful path to compliance. FIT 21 is seen by many as a necessary step to provide clear rules and promote innovation while ensuring consumer protection.
Some in crypto have said it is a start, and some have been sharper in criticism, saying it doesn't address the core issue that crypto doesn't fit into existing laws.
The White House has indicated overnight that Biden will not veto this law if it passes Congress, despite being opposed to its passage generally. The law will now move onto the Senate where Democrat Whips have been rousing opposition but a growing base of Democrats are giving possible support with 71 Democrats in the House voting the law through.
What's Next?
The convergence of these legislative efforts highlights the growing recognition of the need for updated regulations in the rapidly evolving crypto industry. While Australia contends with a new slew of AML/CTF reforms and the recently implemented digital ID bill, we remain well behind the US with respect to crypto reform, with ASIC enforcing traditional financial services laws, and no real attempt in ongoing policy discussions to deal with a the core issue of when a token would be (or not) a financial product.
As Australia is likely to follow the ilk of the United States, the upcoming weeks could provide significant insight into Australia's own future given that we often follow the US lead.
By Michael Bacina, Steven Pettigrove, and Luke Misthos