Key Takeaways
- The SEC has replaced SAB 121, offering a principles-based approach for crypto custody accounting.
- Under SAB 122, banks are allowed to use established accounting principles to assess and record potential risks associated with holding customer crypto.
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The US SEC has issued Staff Accounting Bulletin No. 122 (SAB 122), rescinding specific accounting guidance for custodial crypto assets previously addressed in SAB 121. This change provides more accounting flexibility, easing the accounting burden for firms, including regulated banks, considering offering crypto custody services.
SEC commissioner Hester Peirce announced SAB 122 on X, stating, “Bye, bye SAB 121! It’s not been fun.” Peirce and acting SEC Chairman Mark Uyeda are leading the newly formed crypto task force aimed at developing proactive regulatory frameworks and practical registration pathways for crypto following the departure of former SEC chair Gary Gensler.
Released in 2022, SAB 121 mandates companies holding crypto assets on behalf of their customers to record those assets as liabilities on their balance sheets, a requirement that has drawn criticism from various stakeholders who argue that it makes crypto custody services economically infeasible for many firms.
The policy left consumers with limited secure custody options as financial burdens deterred banks and other financial entities from offering such services.
Industry members argued that SAB 121 unfairly prevented banking organizations from offering digital asset services and products compared to other financial institutions.
Efforts have been made to overturn the SEC’s accounting guidance on custodial crypto assets. In February 2024, Representative Mike Flood introduced H.J. Res. 109 in the House of Representatives, seeking to overturn SAB 121 under the Congressional Review Act. The House and Senate passed H.J. Res. 109 in May.
It was later presented to former President Joe Biden, but he vetoed the measure due to concerns that it would undermine the SEC and pose risks to investors and consumers.
Under the new SAB 122, banks and other financial institutions are now allowed to apply existing accounting standards for contingencies when assessing potential liabilities.
The transition from SAB 121 to SAB 122 provides companies with greater flexibility in determining how to recognize liabilities associated with custodied crypto assets.
With SAB 122, banks can now custody crypto like Bitcoin more feasibly, treating potential losses as contingent liabilities. This change simplifies regulatory compliance and supports the expansion of banking services in the crypto sector.
“SAB 121 was disastrous for the banking industry, and only stunted American innovation and advancement of digital assets. I am THRILLED to see it repealed and get the SEC back on track to fulfilling its intended mission,” Senator Cynthia Lummis said.
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