One of the persistent complaints over the way the U.S. Securities and Exchange Commission has operated in the digital asset space is its failure to issue clear guidelines.  Within days of the inauguration of President Trump, and consistent with SEC acting Chairman Mark Uyeda’s commitment to shifting the regulator toward setting clear guidelines for digital assets, on January 23, 2025, the SEC issued Staff Accounting Bulletin (SAB) No. 122, effectively rescinding the controversial SAB No. 121. This move has significant implications for entities involved in safeguarding crypto-assets, as well as for the broader financial and regulatory landscape.

From SAB 121 to SAB 122

The SEC issued Staff Accounting Bulletin No. 121 on March 31, 2022, in response to the growing number of entities safeguarding crypto-assets for their platform users. The bulletin provided interpretive guidance on accounting for obligations to safeguard these assets. Specifically, it required entities to recognize a liability and a corresponding asset for the fair value of the crypto-assets held for users.  It also mandated detailed disclosures about the nature and amount of crypto-assets held, as well as any vulnerabilities related to concentrations in crypto-asset safeguarding.

From its inception, SAB 121 faced significant criticism from various stakeholders, including industry participants, lawmakers, and even some SEC commissioners. Critics argued that the guidance imposed undue burdens on entities, particularly those in the crypto industry, by requiring them to recognize liabilities for assets they did not control.  Until SAB 121, an entity generally did not record safeguarded crypto assets of its users on its balance sheet (with a corresponding liability to return those assets) unless the entity has control of those assets.  Commissioner Hester Peirce, a vocal critic of SAB 121, noted that the SEC’s lack of clear regulatory guidance on crypto-assets contributed to the legal and regulatory risks the bulletin sought to address.

Additionally, a bipartisan group in Congress opposed SAB 121, leading to a resolution under the Congressional Review Act to cancel SAB 121. See our post here.  Although President Biden vetoed the resolution, the controversy surrounding the bulletin persisted.

In response to the ongoing criticism, the SEC issued SAB 122 on January 23, 2025, which rescinds the interpretive guidance included in SAB 121. The new bulletin emphasizes that entities with obligations to safeguard crypto-assets should determine whether to recognize a liability related to the risk of loss under such an obligation by applying existing accounting standards.  Specifically, SAB 122 directs entities to apply the recognition and measurement requirements for liabilities arising from contingencies set forth in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 450-20, Loss Contingencies, or International Accounting Standard (IAS) 37, Provisions, Contingent Liabilities, and Contingent Assets.

Implications and Conclusion

The rescission of SAB 121 has several important implications for entities involved in safeguarding crypto-assets:

1.  SAB 122 removes the requirement to reflect the value of safeguarded crypto assets on the balance sheet. The removal of these assets and liabilities can impact a company’s financial ratios, potentially improving measures of financial health and capital adequacy.  

2.  The rescission of SAB 121 is expected to make it more financially practical for banks and other financial institutions to offer custodial services for crypto assets. The previous accounting treatment under SAB 121 was seen as a significant obstacle to providing such services. By aligning the accounting treatment of safeguarded crypto-assets with that of other custodied assets, SAB 122 creates a more level playing field for traditional financial institutions to participate in the crypto-asset space.

3.  While SAB 122 rescinds the specific disclosure requirements of SAB 121, entities must still provide relevant information about their obligations to safeguard crypto-assets.  Entities that  safeguard crypto-assets for others must still determine whether to recognize a liability related to a risk of loss under those obligations.

4.  When companies apply the guidance in SAB 122 retrospectively, it means they need to go back and adjust their financial statements for all prior periods presented, as if SAB 122 had always been in effect.  The need to remove the impact of SAB 121 from their previously issued financial statements primarily involves derecognizing the assets and liabilities related to safeguarding crypto-assets that were recorded under SAB 121.

The SEC’s decision to rescind SAB 121 through the issuance of SAB No. 122 marks a significant shift in the regulatory landscape for entities safeguarding crypto-assets. By aligning the accounting treatment of these obligations with existing standards for contingencies, the SEC aims to provide clearer and more consistent guidance.  As the regulatory environment for crypto-assets continues to evolve, staying informed and compliant with the latest guidance will be crucial for navigating the complexities of this emerging sector.

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David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.