SEC Faces Mounting Pressure from Lawmakers to Back Off Crypto Industry

The U.S. Securities and Exchange Commission (SEC) faces a growing number of calls to curtail its oversight of the crypto industry—and they’re coming from inside and outside the House.

The U.S. House Financial Services Committee voted on Thursday to appeal Staff Accounting Bill 121, which has since March 2022 been used to stop banks from acting as custodians of digital assets. When it was passed, the SEC maintained that the measure would guard against “significant risks and uncertainties associated with safeguarding crypto assets.”

But now there’s mounting criticism from House committee members about how SAB 121 was enacted.

“The SEC issued SAB 121 without conferring with the prudential regulators who are the experts on regulating bank custody,” said Rep. Mike Flood (R-NE). “That’s a pretty significant oversight.”

In October, a Government Accountability Office report took issue with the way that SAB 121 was enacted—without the SEC submitting a report to Congress—and how it’s been used since as a stand-in for more concrete regulatory guidance.

“This guidance was offered to protect investors against the mishandling of customer crypto assets by custodians, a practice that was at the core of FTX’s spectacular collapse when billions of crypto assets went missing,” Rep. Maxine Waters (D-CA) said Thursday during the House committee meeting.

SEC in “enforcement-only mode”

But that’s not all. Yesterday, eleven U.S. state attorneys general filed a joint amicus brief in the regulator’s lawsuit against Payward Ventures—crypto exchange Kraken’s parent company—to challenge the SEC’s authority over crypto firms.

“The SEC’s enforcement action exceeds its delegated powers,” the attorneys said in the filing. “The court should reject categorizing crypto assets as securities absent an investment contract. The SEC’s exercise of this undelegated authority puts state consumers at risk by preempting state statutes better tailored to the specific risks of non-securities products.”

The brief was submitted by attorneys general from Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas.

The same day, SEC Commissioner Hester Peirce said during an ETHDenver event that the regulator has been stuck in “enforcement-only mode.” The knock-on effect for developers has been a persistent worry about what and how to build new technology that will keep them out of the crosshairs, she argued.

“What I reflect is the fact that you all are spending part of your brainpower” wondering how to avoid getting sued, she said at the event yesterday. “If we had clearer rules you could focus on building.”