Congressional Memo Challenges SEC’s SAB 121

A memorandum submitted by several U.S. Congress members, including chairs from key financial committees, has called into question the enforceability of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin 121 (SAB 121). This development follows a decision by the Government Accountability Office (GAO) characterizing SAB 121 as a rule under the Congressional Review Act.

Introduced on April 11, 2022, without consultation with major financial regulatory bodies, SAB 121 requires custodians to report customer custodial digital assets on their balance sheets, evaluated at fair value. This directive deviates from standard accounting practices, potentially misrepresenting custodians’ legal and economic responsibilities and escalating consumer risk.

The GAO, in October 2023, asserted that companies might alter their behaviors to align with the SEC’s interpretations in the Bulletin, due to the SEC’s role in monitoring public disclosures and enforcing compliance. Notably, the SEC did not submit SAB 121 to Congress or the GAO, nor did it publish it in the Congressional Record, as mandated by the Congressional Review Act.

The Congressional memo highlights concerns that enforcing this noncompliant rule would create a precedent for regulatory evasion of the Administrative Procedure Act (APA), effectively granting the SEC undue regulatory control over unauthorised entities. The Congress members have requested financial authorities to clarify, through guidance or action, that SAB 121 is not enforceable following the GAO’s determination.

SAB 121’s mandate for banks to record client cryptocurrency holdings on their balance sheets, with appropriate valuation and capitalization, has drawn criticism from industry representatives and U.S. politicians. They argue that it could deter regulated banks from acting as crypto custodians and treat crypto holdings differently from traditional assets.

The inquiry into SAB 121’s status as a rule stemmed from Senator Cynthia Lummis’s letter to the U.S. Comptroller General in August 2022. The Congressional Review Act necessitates that an agency rule be reported to both Congress and the comptroller general, with a provision for Congressional disapproval. In June 2022, five senators had already expressed opposition to what they termed “backdoor regulation” in a letter to SEC Chair Gary Gensler.

The memorandum signifies a significant moment in the oversight of digital asset regulation, emphasizing the need for clarity and adherence to established legislative procedures.

Image source: Shutterstock


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US Court Backs IRS in Part Against Kraken Over Tax Rules

The United States District Court, Northern District of California, has partially upheld a summons issued by the Internal Revenue Service (IRS) to Payward Ventures, Inc. and its subsidiaries, collectively known as “Kraken“. Kraken, a prominent online crypto exchange, has been under scrutiny for its compliance with tax regulations.

The court order comes after Kraken failed to comply with an IRS summons, leading to the United States initiating legal action to enforce it. The court’s decision to grant the petition in part and deny it in part marks a crucial juncture in this ongoing case.

Kraken, known for its global reach, offers its digital currency exchange services to users in over 190 countries. The platform provides a variety of account levels, including Starter, Express, Intermediate, and Pro, each requiring different levels of user verification. While the Starter and Express accounts offer limited services and require lower levels of verification, the Intermediate and Pro accounts offer a wider variety of transaction types and higher withdrawal limits, necessitating additional user verification.

The IRS investigation into Kraken was triggered by concerns over tax compliance issues related to cryptocurrency. These concerns were highlighted in reports by the Government Accountability Office (GAO) in 2013 and the Treasury Inspector General for Tax Administration (TIGTA) in 2016. The reports identified several tax compliance risks associated with virtual currencies, including underreporting of income and tax evasion.

In response to these concerns, the IRS expanded its Electronic Payment Systems Initiative (EPSI) to address U.S. taxpayers who use virtual currencies for tax avoidance purposes. As part of this initiative, the IRS established a Virtual Currency Issue Team (VCIT) to study the issue and consider the compliance impact related to virtual currencies. The summons to Kraken is part of the tools being used in this investigation.


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