SEC Backpedals on Controversial Crypto Tax Bulletin!

Based on available reports, the US Securities and Exchange Commission has finally backed off on crypto accounting regulations. It wasn’t until Thursday, when the commission released its new Staff Accounting Bulletin-SAB 122-that it officially withdrew SAB 121. As part of the process, SAB 122 will publish a change to how financial institutions, including banks and publicly traded companies, will account for crypto assets. 

What is SAB 121 and the Controversy

SAB 121 was initiated during the chairmanship of former SEC Chair Gary Gensler. It allegedly forced financial institutions to put customers’ cryptocurrency holdings on their balance sheets. This was supposed to protect investors in case of bankruptcies or financial instability, according to Gensler, adding the risks posed by a lack of clarity.

Gensler allegedly referred to several bankruptcy cases where courts ruled that crypto assets held by third parties were not “bankruptcy remote”. The said lack of protection led the SEC to impose strict accounting rules under SAB 121. Firms were required to report crypto holdings as liabilities on their financial statements, a move that the crypto industry was not happy with.

The backlash was due to the SAB 121 being seen as piling too much on to financial firms-an already heavily regulated sector in many areas. Critics argued the guidance was prescriptive, unclear on its application to decentralized and unfair to custodians.

Congressional Pushback and the Role of Hester Peirce

SAB 121 also caused controversy in the legislative arena. Officials say, a Congressional Review Act resolution of disapproval of the bulletin passed the House and the Senate. However, Former President Joe Biden allegedly vetoed the resolution that would have ended the SAB 121 guidance, making it another layer of complexity in the regulatory debate.

One of the most vocal critics of SAB 121 was SEC Commissioner Hester Peirce, a crypto regulation advocate for balance.

Peirce has long said the agency shouldn’t make rules without understanding the crypto market. She’s said SAB 121 was a bad approach for the agency which hasn’t put out enough guidance on how securities laws apply to crypto.

According to her, “addressing difficult regulatory issues through an accounting bulletin was neither effective nor appropriate”.

Thursday’s announcement withdrawing SAB 121 was the culmination of Peirce’s years of advocating for clearer and more adaptive crypto policies. Her leadership on this issue was part of a broader effort within the SEC to rethink its approach to crypto regulations and now she’s been handed the baton to lead the agency’s new crypto task force.

The New Way Under SAB 122

SAB 122 is a big change in the SEC’s crypto asset regulatory framework. The bulletin rescinds the SAB 121 provisions and instead tells financial firms to follow the established standards of the Financial Accounting Standards Board, or IAS.

This puts U.S. crypto asset accounting in line with international standards and will bring more clarity and consistency to financial institutions. SAB 122 also says entities should provide disclosures sufficient for investors to understand their role in safeguarding the crypto assets held for customers.

In this way, the SEC is trying to address the criticisms of SAB 121 by being flexible and standardized while keeping investor protection front and center. This is because of the realization that crypto markets are unique and regulations are meant to support growth, not stifle it.

Implications for the Crypto Industry and Beyond

The crypto industry, which has been asking for a bit of clarity and balance in the regulations around it, should welcome the apparent withdrawal of SAB 121. By not having to count customers’ crypto as a liability, SAB 122 reduces the cost for custodians and other service providers to operate.

This also has implications for the wider financial world: banks and publicly traded companies looking to get into crypto now have a more standardized and predictable accounting and reporting framework. This could open up more institutional access to the crypto market and drive innovation and access to digital assets.

Investors also benefit from the new way the SEC has gone; the new guidance allows companies to use global standards that investors are already familiar with. This will help in building investor confidence and, hence, more trust and faith in market participants.

Looking Ahead: A New Crypto Regulation Era

The withdrawal of ‘SAB 121 and adoption of SAB 122 is a turning point in the SEC’s crypto regulations. While there are still many challenges, the new guidance is a step towards a more practical and inclusive regulatory framework that acknowledges the crypto market is complex.

In a fast-changing crypto market, the SEC’s approach needs to adapt and be refined. SAB 122 is a good development but only one piece of a very big puzzle. Going forward, the agency needs to work with industry participants, regulators and other international organizations to shape comprehensive regulations for the crypto ecosystem.

Stay updated with Deythere as we’re available around the clock, providing you with updated information about the state of the crypto world.

FAQs

1. What is SAB 121 and why was it so controversial?

SAB 121 was a Staff Accounting Bulletin’ issued by the SEC in 2022. It required financial institutions to put customers’ crypto on their balance sheet as a liability. It was panned as being too complicated and confusing and got a lot of pushback from the crypto industry and Congress.

2. What does SAB 122 do?

SAB 122 rescinds SAB 121 and tells financial institutions to go back to existing accounting standards from ‘FASB or International Accounting Standards that are currently in effect, etc. for transparency and investor disclosure.

3. What does this mean for a financial institution?

SAB 121 being rescinded reduces the regulatory burden on financial institutions so they can operate more freely in the crypto space. SAB 122 aligns with global standards so firms can have more clarity and consistency when exploring the crypto ‘market.

4. What does this mean for the future of crypto regulations?

SAB 122 is the direction the SEC is headed with crypto regulations. More balanced and inclusive policy to support innovation and investor protection will hopefully mean more predictability in this space.