SEC Revokes SAB 121, Banks Could Custody Crypto?

The U.S. Securities and Exchange Commission (SEC) has officially revoked the controversial Staff Accounting Bulletin 121 (SAB 121) and replaced it with SAB 122. This move paves the way for mainstream financial institutions in the United States to hold cryptocurrency, marking a significant shift in the regulatory landscape. The announcement came on January 23, following Donald Trump’s formal inauguration as the 47th President of the United States. Alongside this development, Trump signed his first crypto executive order, establishing the Presidential Working Group on Digital Assets Markets to create a framework for crypto regulation and a strategic national digital asset stockpile.

What Is the SAB 121 Rule?

SAB 121 was introduced by the SEC in March 2022 as part of its regulatory framework for cryptocurrency custody. It required financial institutions holding digital assets for customers to classify them as liabilities on their balance sheets. This rule treated digital assets similarly to conventional custodial assets, such as cash or securities.

The rule was met with widespread criticism from the crypto industry and financial institutions. Many argued that the burdensome and complex reporting requirements made it difficult for banks to offer crypto custody services. The Government Accountability Office (GAO) called for a Congressional review, and while a bipartisan resolution to overturn SAB 121 was passed in May 2024, it was ultimately vetoed by then-President Joe Biden.

SAB 122 Cancelled while SAB 122 Introduced

The SEC’s decision to revoke SAB 121 by introducing SAB 122 has been a long-awaited victory for the financial and crypto sectors. The original rule faced significant opposition due to its impact on financial reporting and institutional involvement in crypto custody. In September 2024, a group of Republican lawmakers pushed for its repeal, further pressuring the SEC to reconsider its stance.

SAB 122 removes the restrictive accounting guidelines that previously categorized crypto assets as liabilities. The shift aligns with the changing regulatory approach under the new administration, focusing on fostering innovation while maintaining regulatory oversight.

Key Changes to Look For

With the introduction of SAB 122, several notable changes take effect:

1. Liability Assessment: Institutions must now assess whether safeguarding crypto assets creates a liability using established accounting standards such as FASB ASC 450-20 or IAS 37.
2. Retrospective Application: The changes apply retrospectively for annual periods starting after December 15, 2024, with early adoption permitted in SEC filings.
3. Enhanced Disclosures: Companies must continue providing comprehensive disclosures about safeguarding obligations, ensuring transparency for investors.

For example, under SAB 121, a firm safeguarding $1 million in crypto would report the entire amount as a liability, potentially inflating its obligations. Under SAB 122, only an estimated risk of loss, such as $20,000 (2%), would be recorded, making financial statements more reflective of actual risk.

What Do These Changes Mean for Crypto Custody and Regulation?

The repeal of SAB 121 has several implications for the crypto industry and financial institutions:

1. Simplified Custody Operations: Financial institutions can now manage crypto assets without the burden of complex liability classification, making it easier to integrate into their existing operations.
2. Increased Trust in Crypto Custody: With clearer regulatory guidelines, traditional financial firms can offer crypto custody services with greater confidence, potentially attracting more customers.
3. Encouragement for Banks to Enter the Market: Removing regulatory hurdles allows banks to explore crypto custody services without fear of complex accounting requirements, fostering greater institutional adoption.
4. Balanced Regulation Approach: The SEC’s move suggests a shift towards more pragmatic and balanced regulations, focusing on the unique characteristics of digital assets rather than imposing traditional financial rules.

Industry Reactions to the Rescindment of SAB 121

The industry has largely welcomed the SEC’s decision to rescind SAB 121. Several notable figures have expressed their support:

• US Representative Wiley Nickel noted that the rule hindered American banks from offering crypto exchange-traded products (ETPs), which could have ceded market power to non-bank entities.
• SEC Commissioner Hester Peirce, now leading the agency’s crypto task force, expressed relief, stating, “Bye, bye SAB 121! It’s not been fun.”
• House Financial Services Committee Chair French Hill celebrated the change, calling it a “win” for financial institutions and the broader crypto industry.

The overall sentiment is optimistic, with many viewing the repeal as a step toward a more accommodating regulatory environment that supports growth and innovation in the crypto sector.

Conclusion

The revocation of SAB 121 and the introduction of SAB 122 signal a new era for crypto custody in the United States. By removing restrictive regulations and promoting a balanced approach, financial institutions can now explore crypto opportunities with greater confidence. As the regulatory landscape continues to evolve under the new administration, the industry is poised for significant growth and mainstream adoption.