President Biden Vetoes Crypto Custody Bill
Commentary by Samuel Ramer
President Biden vetoed H.J.Res. 109, a congressional resolution of disapproval on SEC Staff Accounting Bulletin No. 121 ("SAB 121").
In his statement, President Biden explained that he was vetoing H.J.Res. 109 because it would "inappropriately constrain the SEC's ability to set forth appropriate guardrails and address future issues." The President also said that his administration would "not support measures that jeopardize the well-being of consumers and investors."
President Biden's veto comes shortly after House Financial Services Committee Chair Patrick McHenry (R-NC) and a bipartisan group of legislators urged President Biden either to sign H.J.Res. 109 into law, or "work with the SEC to rescind the staff guidance." In their letter to the President, the legislators explained that SAB 121 requires a custodian to treat a digital asset that it custodies as both an asset (what it holds in custody) and as a liability (its obligation to return those assets)—an accounting treatment that affects the size of the custodian's balance sheet (see related coverage.) The legislators highlighted an October 31, 2023, Government Accountability Office ("GAO") finding that SAB 121 qualifies as a rule under the Administrative Procedure Act ("APA") and Congressional Review Act ("CRA"). Based on the GAO determination, the legislators argued that the SEC should have undertaken a formal rulemaking process, including a notice and comment period rather than issue the requirement as guidance. The legislators said that despite the GAO determination and the Congressional resolution, "SEC Chair Gary Gensler has insisted the SEC will not revise or rescind the guidance."
President Biden emphasized that his administration remains committed to working with Congress on digital asset regulation.
Commentary
The GAO's decision that SAB 121 is a "rule" under the Administrative Procedure Act ("APA") was a substantial development that changed the political and legal consequences for enforcement of this SEC guidance. Congress clearly indicated its opposition to this rule by passing the Resolution of Disapproval. Now that President Biden vetoed the Resolution, the ball is back in Congress' court.
President Biden's veto is unlikely to be overturned, as that would require a two-thirds majority in both chambers. If there is a change of administration next year, Congress could try to overturn the rule again, or pass legislation to obviate it. Look for attempts to insert this type of provision in future omnibus or large legislative packages.
In the meantime, any firm subject to enforcement of this guidance might consider challenging it in court as a "rule" under the APA, and as such invalid because it has not gone through a notice and comment period. The use of internal agency guidance was an end-run around the APA—an end-run that blocked stakeholders, including the banking regulators, from being able to comment before the SEC could impose such substantial and industry-altering obligations.
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