Briefing
The U.S. Securities and Exchange Commission (SEC) rescinded Staff Accounting Bulletin 121 (SAB 121) on January 23, 2025, through the issuance of Staff Accounting Bulletin 122 (SAB 122). This action eliminates the requirement for financial institutions safeguarding client crypto assets to record the full value of those assets as liabilities on their balance sheets. The primary consequence for the industry is a significant reduction in capital and balance sheet burdens, which enables broader institutional participation in digital asset custody. The change mandates entities to apply existing Financial Accounting Standards Board (FASB) and International Accounting Standards (IAS) guidance for contingent liabilities, focusing on the risk of loss rather than the total asset value.
Context
Before this action, SAB 121, issued in March 2022, created a substantial compliance challenge for financial institutions. It required entities holding crypto assets for clients to record these assets and a corresponding liability on their balance sheets. This interpretation significantly increased capital requirements and operational complexities, effectively discouraging regulated banks and traditional financial service providers from offering digital asset custody services. The prevailing framework fostered legal uncertainty and concentrated custody risks with non-bank entities, as traditional financial institutions faced prohibitive accounting treatment.
Analysis
The rescission of SAB 121 fundamentally alters the compliance frameworks for institutions engaged in digital asset custody. Entities are no longer compelled to recognize the full fair value of safeguarded crypto assets as a balance sheet liability. Instead, SAB 122 directs them to assess and account for the risk of loss consistent with established FASB and IAS guidance for contingencies.
This shift mitigates the punitive capital charges previously associated with crypto custody, thereby enabling banks and other regulated financial entities to integrate digital asset services more readily. The change fosters a more equitable regulatory landscape, aligning crypto asset accounting with traditional asset safeguarding practices and potentially diversifying the custody ecosystem.
Parameters
- Regulatory Body → U.S. Securities and Exchange Commission (SEC)
- Action Taken → Rescission of Staff Accounting Bulletin 121 (SAB 121)
- New Guidance → Staff Accounting Bulletin 122 (SAB 122)
- Effective Date of Rescission → January 23, 2025
- Targeted Entities → Financial institutions safeguarding crypto assets for platform users
- Prior Requirement → Record full value of client crypto assets as balance sheet liabilities
- New Requirement → Apply existing FASB/IAS guidance for contingent liabilities based on risk of loss
Outlook
The rescission of SAB 121 establishes a precedent for a more pragmatic regulatory approach under the current SEC leadership, aligning with broader administration goals for digital financial technology. This move is anticipated to encourage greater participation from traditional financial institutions in the digital asset market, potentially fostering increased liquidity and stability. Future developments may include further clarity on digital asset classification and tailored regulatory frameworks, as the SEC’s new crypto task force, led by Commissioner Hester Peirce, continues its work. The shift signals a potential pivot from enforcement-led regulation to a more structured policy development.
