Key Takeaways
- The SEC has now replaced SAB 121 with SAB 122, which provides a revised framework
- Under the new guidance, companies must evaluate potential risks related to their custody activities and reflect those risks as contingent liabilities on their balance sheets
The U.S. Securities and Exchange Commission (SEC) has repealed Staff Accounting Bulletin (SAB) 121, which required companies to record digital assets held in custody as both an asset and a liability on their balance sheets.
SAB 121, treated client-held assets as balance sheet items of the custodians. However, since these assets legally belong to clients, many financial experts argued this approach was misaligned with traditional accounting principles. The guidance also complicated compliance with prudential regulations for banks, effectively limiting their ability to offer cryptocurrency and digital securities custody services.
The SEC has now replaced SAB 121 with SAB 122, which provides a revised framework. As per the announcement, under the new guidance, companies and firms must evaluate potential risks related to their custody activities and reflect them as contingent liabilities on their balance sheets. This approach aligns with how banks manage risks associated with other financial activities, such as potential losses on loans.
The rescission follows ongoing scrutiny and debate over SAB 121’s implications. Earlier this year, the Government Accountability Office (GAO) recommended Congressional review of the bulletin. Both the House and Senate voted to overturn it, but the effort faced a presidential veto. Former President Biden justified the veto by emphasizing the SEC’s need to maintain flexibility in crafting regulatory safeguards.
French Hill, Chairman of the House Financial Services Committee, welcomed the SEC’s decision to rescind SAB 121, calling it a step toward supporting innovation in the digital asset sector. Hill noted that holding reserves against custodial digital assets was not a standard financial practice and expressed optimism about the new approach.
The repeal has also been acknowledged by SEC Commissioner Hester Peirce, who has been a vocal advocate for balanced crypto regulation. Peirce, often referred to as “Crypto Mom,” expressed relief at the shift, remarking that SAB 121 “has not been fun” for the industry or its participants.
SAB 121’s introduction had far-reaching consequences, including restricting U.S. banks from fully participating in tokenization and other digital asset-related activities. The latest development comes days after SEC launched a crypto task force headed by Hester Pierce.
