U.S. Senator Cynthia Lummis has achieved a significant victory for the cryptocurrency community through a decision by the Government Accountability Office (GAO). On October 31, GAO issued a ruling indicating that the U.S. Securities and Exchange Commission's (SEC) Staff Accounting Pronouncement No. 121 should be subject to congressional review. The pronouncement, which was announced in March 2022, had sparked concerns and opposition from several pro-cryptocurrency lawmakers.
This decision by GAO resulted from a letter sent by Senator Lummis to the U.S. Comptroller General in August 2022. The letter sought an evaluation of whether the pronouncement qualified as a rule subject to the Congressional Review Act (CRA). The CRA mandates that reports on agency rules be submitted to the Comptroller General and both houses of Congress, with a process that allows Congress to veto the rule. GAO's assessment found that the SEC pronouncement fell within the CRA's jurisdiction, based on the guidelines outlined in the Administrative Procedure Act (APA).
The Government Accountability Office determined that there was cause to believe that the SEC may adjust its actions to align with the interpretations specified in the pronouncement. Furthermore, it noted that the pronouncement had a prospective impact and was intended to convey and prescribe policy. Consequently, GAO concluded that the pronouncement met the criteria for an APA rule.
The SEC clarified that the pronouncement represents the staff's perspective on accounting for obligations to safeguard cryptoassets held on behalf of platform users. It stressed that these statements do not constitute formal rules or interpretations of the SEC but rather reflect staff interpretations and practices. The pronouncement employs hypothetical scenarios to outline the SEC's recommended best practices for protecting cryptoassets held by platforms serving their users, such as Coinbase and PayPal. Notably, it advised platforms to record users' assets as both liabilities and assets on their financial statements and to initially list them at their fair value. This represents a significant departure from conventional accounting practices, where custody assets were not typically reflected on the balance sheet.
The pronouncement had encountered opposition from various quarters, including a critical response from SEC Commissioner Hester Peirce, who considered the recommended accounting procedures a response to perceived risks. Senator Lummis and four other Republican senators had expressed dissatisfaction with the pronouncement's regulatory implications in a letter to SEC Chairman Gary Gensler. The findings from GAO, while serving an informational purpose, send a clear message to regulatory agencies, highlighting the importance of heeding the recommendations put forth by the agency.
