What was SAB 121? The Staff Accounting Bulletin (SAB) 121 was introduced by the SEC in March 2022. It aimed to regulate how financial institutions handle cryptocurrency custody. The rule required these institutions to treat any crypto assets they held for customers as liabilities on their balance sheets. In simple terms, it treated digital assets like traditional custodial assets, such as cash or securities.

Many in the crypto industry found this rule problematic. They argued it was overly complicated and didn’t fit the unique nature of crypto assets. They believed it could stifle market growth and make it harder for institutions to offer crypto custody services.

The Government Accountability Office (GAO) initially called for a Congressional review of SAB 121. This led to votes in both the House and Senate to rescind it. However, then-President Joe Biden vetoed that repeal.

After Donald Trump took office as the 47th President of the United States, the SEC announced the cancellation of SAB 121 on January 23. They introduced SAB 122, effectively rescinding the previous rule.

Industry Reactions to the Rescindment of SAB 121

The SEC's decision to rescind SAB 121 drew significant reactions from the industry. US Representative Wiley Nickel noted that the rule might have limited American banks' ability to custody crypto exchange-traded products (ETPs) at scale. This could have increased power among non-bank entities.

SEC Commissioner Hester Peirce, who leads the agency’s crypto task force, expressed her relief on social media. She said, “Bye, bye SAB 121! It’s not been fun.” This sentiment echoed the frustrations of many in the financial services and crypto sectors.

Several industry figures celebrated the rescindment. House Financial Services Committee Chair French Hill tweeted that he was “pleased” to see the “misguided SAB 121 rule has been rescinded.”

SAB 122 Explained: Key Changes

SAB 122 makes important changes. It removes the guidance outlined in Topic 5.FF, which focused on how to account for obligations to safeguard crypto assets held for users.

Here are the key changes under SAB 122:

  • Liability assessment: Companies must now determine if safeguarding crypto assets creates a liability. They should measure it using established accounting standards like FASB ASC 450-20 or IAS 37.
  • Retrospective application: These changes will apply retrospectively for annual periods starting after December 15, 2024. Companies can also choose to adopt them early in SEC filings.
  • Enhanced disclosures: Companies must continue to provide detailed disclosures about safeguarding obligations. This ensures investors understand the risks involved.

To illustrate the difference, imagine a company safeguarding $1 million in crypto for customers. Under SAB 121, the entire $1 million would be recorded as a liability, inflating financial obligations. Under SAB 122, only the estimated risk of loss, say $20,000 (2% of the total), would be recorded. This aligns with standard accounting practices.

Remember, the 2% loss figure is hypothetical. SAB 122 requires institutions to calculate the actual risk of loss based on their own data and assessments, not just use an arbitrary percentage.

What Does the Rescinding of SAB 121 Mean for Crypto Custody and Regulation?

The repeal of SAB 121 simplifies crypto custody, encourages banks to get involved, and boosts trust in traditional finance.

Here’s what it means for financial institutions and their clients:

  • Simplified custody operations: The removal of the requirement to classify cryptocurrency as liabilities makes custody processes easier for organizations managing these assets.
  • Increased trust in crypto custody: As traditional financial firms shed cumbersome regulations, public trust in their ability to provide crypto custody services may grow. This could bridge the gap between conventional finance and the crypto world.
  • Encouragement for banks to enter the crypto market: The rescinding of SAB 121 removes a major barrier for traditional banks looking to offer crypto custody services. With fewer complex accounting requirements, banks may be more willing to enter the crypto space, leading to greater institutional involvement.

The SEC's ruling suggests a possible shift toward balanced regulation of cryptocurrency assets. Regulators might focus on measures that consider the unique features of digital assets instead of enforcing broad regulations that hinder innovation.

They may also pay attention to emerging technologies like blockchain-based assets and decentralized finance (DeFi), which could significantly impact the financial industry for years to come. SAB 122 encourages banks to step into the crypto market and signals a move toward more thoughtful, forward-thinking regulation for the crypto space.