SEC has repealed SAB 121, allowing banks to custody crypto assets

The U.S. Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin No. 122 (SAB 122), which rescinds prior accounting guidance for custodial crypto assets outlined in SAB 121. This revision introduces greater accounting flexibility, reducing the compliance burden for firms, including regulated banks, that are considering offering crypto custody services.

SEC Commissioner Hester Peirce announced the update on X (formerly Twitter), stating, “Bye, bye SAB 121! It’s not been fun.” Peirce and acting SEC Chairman Mark Uyeda are spearheading a newly established crypto task force aimed at creating proactive regulatory frameworks and practical pathways for crypto registration, following the departure of former SEC Chair Gary Gensler.

Originally issued in 2022, SAB 121 required companies holding crypto assets on behalf of customers to record those assets as liabilities on their balance sheets. This mandate was widely criticized for making crypto custody services financially unviable for many firms, effectively limiting secure custody options for consumers as banks and financial entities refrained from offering such services due to the economic impact.

Industry participants argued that SAB 121 disproportionately restricted banking organizations from providing digital asset services compared to other financial institutions.

Efforts to overturn SAB 121 gained traction earlier in 2024 when Representative Mike Flood introduced H.J. Res. 109 in the House of Representatives under the Congressional Review Act. The resolution, aimed at reversing the SEC's guidance, was passed by both the House and Senate in May but was ultimately vetoed by former President Joe Biden, citing concerns that its approval could weaken the SEC’s authority and pose risks to investors and consumers.

With the adoption of SAB 122, banks and other financial institutions can now apply existing accounting standards for contingencies when evaluating potential liabilities related to custodied crypto assets. This shift allows companies more flexibility in how they account for liabilities associated with crypto custody.

Under SAB 122, banks can more feasibly provide custody services for cryptocurrencies like Bitcoin, treating potential losses as contingent liabilities rather than immediate balance sheet liabilities. This regulatory change simplifies compliance and opens the door for expanded banking services in the growing crypto sector.

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