In a significant ruling, the United States Government Accountability Office (GAO) has found that the Securities and Exchange Commission (SEC) failed to adhere to the Congressional Review Act (CRA) in its implementation of the cryptocurrency disclosure policy. This verdict has ignited quite a debate over the SEC's approach to crypto regulations and its interpretation of existing securities and exchange laws.
The GAO's Finding
The GAO's decision centers on the Staff Accounting Bulletin 121 (SAB 121), issued by the SEC. SAB 121 directed banks to include customer cryptocurrency holdings on their balance sheets. The GAO declared that this directive, presented through SAB 121, should have undergone the formal rulemaking process outlined in the CRA, rather than being enacted as mere "interpretive guidance."
The SEC's Argument and GAO's Disagreement
The SEC had previously contended that SAB 121 was not a new rule but provided "interpretive guidance." It argued that this interpretation exempted it from the CRA's procedural requirements. The SEC further asserted that SAB 121 did not qualify as an "agency statement" of "future effect."
However, the GAO disputed these claims. It argued that SAB 121 met the criteria of an agency statement, primarily because it was published on the SEC's public website, signifying its endorsement by SEC personnel. Furthermore, the GAO held that the directive was "of future effect" since it provided guidance to entities on safeguarding cryptocurrency assets they might need to hold for clients in the future.
The GAO also maintained that SAB 121 contained policy elements, as it conveyed the SEC's preferences regarding crypto disclosure and custody. Considering the SEC's role in overseeing disclosure requirements, the GAO deemed it reasonable to expect affected entities to take action to align with the guidance provided.
Consequently, the GAO concluded that SAB 121 must comply with the CRA's submission requirements, indicating that the SEC's approach did not align with the law.
Implications for SEC's Crypto Enforcement
This GAO ruling has sparked extensive discussions, with many asserting that the SEC's crypto crackdown efforts last year breached the law. Notably, the SEC issued SAB 121 on March 31, 2022, approximately five months after the peak of the crypto bull market.
Hester Peirce, a pro-crypto SEC Commissioner, criticized the bulletin, characterizing it as a "scattershot and inefficient" approach to crypto regulation. Stuart Alderoty, the legal head of Ripple Labs, found the ruling somewhat poetic, highlighting that it reflected the SEC's transformation into a "Wild West," a term previously used by the SEC's chairman, Gary Gensler, in describing the crypto landscape.
Recent Events and Industry Criticisms
In a related development, Coinbase, a prominent U.S.-based cryptocurrency exchange, argued that Congress is unlikely to grant agencies such as the SEC unilateral authority to create new rules on matters of political or economic significance. The SEC had filed a lawsuit against Coinbase, alleging that it offered securities not registered under the Securities Act of 1933.
Traditional investment managers have also expressed reservations about the SEC's latest product naming rules, questioning the additional compliance burdens associated with refining conventional definitions of bonds and equities.
This GAO ruling underscores the need for clear regulatory frameworks and raises questions about the SEC's approach to cryptocurrency oversight. With the continual growth and evolution of crypto, navigating these legislative challenges will be crucial to ensuring the US doesn't fall behind in the cryptocurrency sector.