SAB 121 Scrapped: The SEC’s New Direction for Crypto Custody
On January 23, 2025, the SEC formally rescinded Staff Accounting Bulletin (SAB) 121 with the issuance of SAB 122. This move has important implications for how financial institutions think about safeguarding crypto assets on behalf of their customers. While SAB 121 had prompted many questions and concerns around accounting for these assets, its rescission suggests a shift in the SEC’s approach to digital asset custodianship.
TL;DR
SAB 121 Rescinded: The SEC has withdrawn the guidance that required certain crypto custodians to record both liabilities and assets for user-held crypto.
SAB 122 Introduced: This new bulletin aligns crypto custody treatment more closely with standard practices for other custodial assets.
Reduced Reporting Burden: Institutions no longer face the extra balance sheet requirements that previously accompanied safeguarding digital assets.
Broader Market Participation: The change may spur more banks and broker-dealers to enter the crypto custody space.
Ongoing Regulatory Interest: Despite the rollback of SAB 121, risks in safeguarding digital assets remain a priority, and regulatory scrutiny continues.
What Was SAB 121?
SAB 121, issued in March 2022, offered guidance on how entities that safeguard crypto assets for customers should treat those assets in their financial statements. It effectively suggested that certain custodians might need to reflect both a liability (for the obligation to safeguard the assets) and a corresponding asset on their balance sheets, based on the risks associated with holding crypto for others. This recommendation was different from long-standing treatments of other assets, like cash or securities, where custodians often keep those customer holdings off their own balance sheets.
Why Was SAB 121 Rescinded?
Several factors influenced the SEC’s decision to rescind SAB 121:
Regulatory Consistency
The SEC’s guidance under SAB 121 differed from traditional practices around custodial assets, creating confusion and inconsistent reporting among different asset classes.
Institutional Pushback
Many in the banking and brokerage sectors argued that SAB 121 discouraged them from offering crypto custody services. The possibility of recording large liabilities for assets they did not directly control raised concerns about capital requirements and the clarity of their financial statements.
Industry Evolution
Since SAB 121’s introduction, the crypto market has matured and expanded. Improved security measures and more robust frameworks for managing digital assets have helped address many of the concerns the SEC initially sought to mitigate.
What the Rescission Means for Crypto Accounting
With SAB 121 no longer in effect, the way custodians treat crypto assets in their financial statements is expected to become more aligned with how they handle other client assets. In practical terms, this may offer several advantages:
Greater Clarity
Removing the special requirements tied to SAB 121 could help institutions present financials that more closely reflect their actual control over, and responsibility for, crypto assets.Encouraging Broader Participation
Banks, broker-dealers, and other financial services firms that were wary of entering the crypto custody space might now feel more confident exploring these services, knowing they won’t automatically trigger unfamiliar balance sheet treatments.Continued Attention to Risk
Even though the formal guidance around asset and liability recognition has been rescinded, institutions will still consider the risks of safeguarding digital assets. Cybersecurity, operational integrity, and other concerns remain top priorities for both regulators and industry participants.
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Conclusion
The rescission of SAB 121 via SAB 122 marks a notable pivot in the SEC’s stance on crypto asset accounting. By removing the specific requirements that once set crypto custody apart from other forms of custody, the Commission may encourage broader adoption of digital asset services within traditional financial institutions. At the same time, the industry’s continued evolution—paired with ongoing regulatory interest—ensures that crypto accounting will remain a dynamic area. For institutions and stakeholders alike, this shift signals both an easing of certain burdens and a call to stay informed about the ever-changing landscape of digital assets.
