SEC Rescinds SAB 121: What It Means for Crypto Firms & How GiGCXOs Supports Compliance
In a significant policy shift, the U.S. Securities and Exchange Commission (SEC) has rescinded Staff Accounting Bulletin No. 121 (SAB 121), a directive that had mandated companies holding digital assets for customers to account for them as liabilities on their balance sheets. This move, announced on January 23, 2025, through the issuance of Staff Accounting Bulletin No. 122 (SAB 122), aims to align the accounting treatment of crypto assets with that of traditional custodial assets.
Background on SAB 121
Issued in March 2022, SAB 121 required entities safeguarding crypto assets for platform users to recognize a corresponding liability and asset on their balance sheets, measured at the fair value of the crypto assets. This guidance was intended to address the unique technological, legal, and regulatory risks associated with digital assets. However, it faced criticism for creating accounting challenges and potentially deterring banks from offering crypto custody services due to inflated balance sheets and increased capital requirements.
Rescission through SAB 122
Responding to industry feedback and legislative pressure, the SEC introduced SAB 122, effectively nullifying the previous guidance. Under SAB 122, entities are no longer required to recognize safeguarded crypto assets and corresponding liabilities on their balance sheets solely due to custody responsibilities. Instead, they should assess whether to recognize a liability related to the risk of loss by applying existing accounting standards for contingencies, such as ASC 450-20 under U.S. GAAP or IAS 37 under IFRS.
Implications for Financial Institutions
The rescission of SAB 121 is poised to have several significant impacts:
Enhanced Participation in Crypto Custody: By removing the requirement to record custodial crypto assets as liabilities, banks and financial institutions may find it more feasible to offer crypto custody services without adversely affecting their balance sheets. citeturn0news11
Standardized Accounting Practices: The alignment of crypto asset accounting with traditional asset custody practices promotes consistency and reduces the operational complexities previously associated with digital assets.
Regulatory Clarity: This move signals a more accommodating regulatory environment for digital assets, potentially encouraging further innovation and adoption within the financial sector.
Industry Response
The decision has been met with approval from various industry stakeholders. The American Bankers Association (ABA) praised the SEC's action, stating that it "restores banks' ability to serve as a trusted and secure option for clients that choose to custody digital assets." citeturn0search8
SEC Commissioner Hester Peirce, appointed to lead a new SEC task force on crypto regulation, also expressed support for the rescission, highlighting the agency's shift towards a more balanced approach in overseeing digital assets.
Conclusion
The revocation of SAB 121 through the issuance of SAB 122 marks a pivotal change in the regulatory landscape for digital assets. By aligning the accounting treatment of crypto custody with traditional assets, the SEC has addressed a significant barrier, potentially paving the way for broader institutional adoption and integration of digital asset services.
