SEC Accounting Bulletins on Digital Assets: SAB 121 and SAB 122

The financial landscape surrounding digital assets has been in flux, marked by regulatory shifts and evolving interpretations. One significant development has been the controversy surrounding the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin 121 (SAB 121), which mandated that digital asset custodians record custodied cryptocurrencies as both liabilities and corresponding assets on their balance sheets. This policy, along with its subsequent modification, SAB 122, has faced considerable scrutiny. While the query mentions the SEC revoked SAB 121 and 122, the available information indicates that SAB 122 rescinded guidance from SAB 121, not a full revocation. This article will explore the complexities of these accounting bulletins, their impact, and the pushback they have faced.

Understanding SAB 121: A Controversial Crypto Accounting Policy

The SEC introduced SAB 121 in March 2022, aiming to address what it perceived as “significant risks and uncertainties associated with safeguarding crypto assets.” This bulletin stipulated that entities acting as custodians for cryptocurrencies must report both a liability and a corresponding asset on their balance sheets, reflecting the full value of the custodied crypto assets. This accounting treatment deviated from the traditional off-balance sheet handling of custody assets in the banking industry. The SEC argued that this measure was crucial for investor protection, given the novel risks associated with digital assets.

However, this approach was met with considerable resistance, particularly from the banking sector. The American Bankers Association (ABA) and the Securities Industry and Financial Markets Association (SIFMA), among other financial bodies, strongly opposed SAB 121, arguing that it effectively precluded banks from offering digital asset custody at scale. This is because placing client assets on the balance sheet negatively impacts prudential requirements such as capital and liquidity ratios, making it economically impractical for banks to provide such services. The broad definition of “crypto-assets” within SAB 121 also raised concerns. The policy defined crypto-assets as "a digital asset that is issued and/or transferred using distributed ledger or blockchain technology using cryptographic techniques," which could encompass traditional assets recorded on a blockchain, thereby creating further challenges for institutions exploring innovative uses of DLT.

SAB 122: A Partial Reversal

In January 2025, the SEC issued Staff Accounting Bulletin No. 122 (SAB 122). SAB 122 formally rescinded the interpretive guidance found in Section FF of Topic 5 in the Staff Accounting Bulletin Series, titled "Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for its Platform Users." This action effectively reversed the specific guidance within SAB 121. While this indicates a significant shift, it's important to note that the core guidance on safeguarding crypto-assets wasn't completely abandoned. Instead, the SEC rescinded the specific accounting treatment detailed in section FF of SAB 121, marking a move away from the blanket on-balance sheet treatment for all custodied crypto-assets.

The Impact of SAB 121 and the Push for Exemptions

The implementation of SAB 121 has had several significant consequences. The most noticeable impact is the exclusion of traditional banking institutions from acting as custodians for products like spot Bitcoin Exchange Traded Products (ETPs). The requirement to record client assets on their balance sheets made it challenging for banks to meet necessary capital and reserve requirements. This has led to a concentration risk, as non-bank entities now dominate the custody market for these ETPs.

Furthermore, the broad definition of "crypto-asset" in SAB 121 has hindered banking organizations’ ability to meaningfully engage in projects using Distributed Ledger Technology (DLT) to record traditional financial assets. The policy made no distinction between cryptocurrencies on public permissionless networks and traditional financial instruments on permissioned blockchains, applying the same on-balance sheet treatment to both.

The ABA and SIFMA have argued that the risks identified in SAB 121, such as technological, legal, and regulatory risks, are adequately mitigated by the existing prudential regulations and supervisory oversight that banks already adhere to. They advocate for the exclusion of prudentially regulated banking organizations from SAB 121’s requirements, emphasizing that these institutions are subject to established regulatory, operational, and legal standards.

Congressional and Industry Opposition

The controversy surrounding SAB 121 has also reached the halls of Congress. The Government Accountability Office (GAO) concluded that the SEC should have submitted SAB 121 for Congressional review before its implementation. This finding has fueled bipartisan efforts to repeal the policy, with resolutions introduced in both the House and Senate. These legislative actions highlight the significant concerns about the SEC's process in issuing SAB 121 and its negative impact on the crypto industry and traditional financial institutions.

The financial industry has voiced strong opposition to SAB 121, highlighting its potential to stifle innovation and create unintended consequences. The American Bankers Association (ABA), the Securities Industry and Financial Markets Association (SIFMA), and other influential groups have emphasized that the policy places traditional financial institutions at a disadvantage compared to unregulated entities. They argue that SAB 121 undermines the SEC's mission of protecting consumers and fostering fair markets by effectively blocking regulated banks from participating in the digital asset ecosystem, pushing consumers towards potentially less secure, non-banking custodians. They have also asked the SEC to exclude digital securities from SAB 121's custody requirements. The groups contend that the technological, legal, and regulatory risks identified in SAB 121 are already addressed by existing regulations for banks, and that applying the policy to traditional assets recorded on DLT is inappropriate.

Conclusion: The Evolving Regulatory Landscape and the SEC revoked SAB 121 and 122

The situation surrounding the SEC revoked SAB 121 and 122 is not as straightforward as a complete cancellation. While the SEC took action to rescind the specific accounting guidance within section FF of SAB 121 with the issuance of SAB 122, the broader debate about the appropriate regulatory approach to digital assets continues. The pushback from both Congress and the financial industry has led to significant changes, but the future of crypto asset accounting and custody remains a fluid situation. The ongoing dialogue between regulators and industry stakeholders will be critical in shaping a more balanced and effective framework for the responsible development and adoption of digital asset technologies. The need for a collaborative approach that harmonizes innovation with investor protection is evident as the landscape evolves.