SEC’s Landmark Move Reshapes Crypto Custody Accounting Rules

WASHINGTON, ​D.C., January 24, ​2025 – In a key policy update, the Securities Commission (SEC) announced the publication of Personnel Accounting Bulletin No. 122 (SAB ​122), officially ​cancelling the ​disputed guide SAB 121. This represents a significant change in ​the accounting treatment of cryptographic guard assets and promises to provide banks and ​financial institutions with greater flexibility in managing these assets.

What led to SAB 121 and its subsequent repetition?

ABS 121, introduced in March 2022, requires financial institutions to ​hold ​cryptographic assets ​on behalf of clients ​to record them as liabilities in their balance sheets. The rule has been criticized extensively by ​the cryptography industry, banks and ​polyethylene manufacturers, who ​argued that it ​imposes an excessive financial burden and discourages institutions from ​providing cryptomonitoring ​services. Opponents also ​argued that the rule creates a competitive ​disadvantage for US banks ​compared to their global counterparts.

Efforts to repeal ​CCS 121 have increased ​over time, leading to the introduction of H.J. Resolution 109 in early 2024. Although the resolution passed ​both the ​House of Representatives and the Senate, ​it was vetoed ​by former President Joe Biden in June 2024, citing concerns about ​investor protection. Despite this setback, the SEC dealt with the issue independently by publishing SAB 122, ​thus cancelling its predecessor.

What SAB 122 contains?

CEB 122 revokes the interpretative guidelines provided under item 5. FF of the series Personnel Accounting Bulletin, which had entrusted the recognition of responsibility for cryptographic custody ​assets. ​Under ​the new ​guidelines, institutions can apply existing accounting ​standards, such as those set out in the Financial Accounting Standards Board (FAB) Accounting Standards (sub-theme 450-20) for contingencies. This principled approach allows organizations to assess and record ​potential risks associated with usual cryptographic ​assets in a more flexible ​manner.

The abolition of ABS ​121 is applied retroactively for the ​annual periods from 15 December 2024, although the institutions may choose to adopt the change before. Organizations ​should report on the impact of this change in accounting in a transparent manner in their financial ​statements, ​ensuring ​that investors ​are fully informed.

How does this affect the banking and cryptographic industries?

The ​repeal of SAB 121 was ​widely welcomed ​by industry stakeholders as a step ​towards promoting innovation and expanding the accessibility of crypt-related financial services. Senator Cynthia Lummis described SAB 121 ​as “a disaster for the banking sector,” noting that ​its repeal will encourage U.S. banks ​to ​participate more actively in the digital asset sector.

In the revised framework, ​banks can now view the potential loss of cryptographic guard ​assets as contingent ​liabilities rather than immediate liabilities. This adjustment simplifies the regulatory burden and aligns cryptographic custody practices with standard financial services. ​Financial institutions are expected to ​re-enter the critical ​custody market, ​providing consumers with safer options to manage digital assets.

What are the broader ​implications?

SAB 122 is considered a milestone in the ​balance between regulatory oversight and market development. It reflects the SEC’s ​recognition of the growing importance of digital assets and the need for a regulatory framework to support their adoption. According to Hester Peirce, SEC Commissioner, who has been a strong ​advocate of cryptographic innovation, the ​movement is a sign of the ​Agency’s commitment to promoting a ​more ​inclusive and ​progressive regulatory environment.

Representative Wiley Nickel noted ​that the previous rule had concentrated cryptographic custody services between non-banks, ​increasing the risk to consumers. ​By allowing banks to offer these services in a more ugly way, SAB 122 reduces this concentration and improves the overall stability of the cryptographic ecosystem.

What ​are the challenges?

Although the repeal of SAB 121 ​has received broad approval, problems remain in the ​navigation of the complex regulatory landscape surrounding digital assets. Policy makers and regulators ​will need to ​ensure that consumer protection is not compromised ​as banks enter the critical custody ​area. ​Transparency ​in ​reporting and compliance with disclosure requirements under the S-K Regulations and the ​PSAB rules will be essential to maintaining investor confidence.

In addition, the ESA initiative stresses the need for comprehensive legislation to address the unique challenges posed by digital ​assets. As industry leaders have pointed out, a coherent legal ​framework could provide more clarity and coherence, paving the ​way for sustained growth and innovation in the sector.

As the ​cryptographic industry continues to evolve, ESA’s actions point towards a more balanced and pragmatic regulatory approach. By allowing financial institutions to participate more flexibly in digital assets, SAB 122 has the potential to ​promote significant progress in ​adopting lock chain technology and ​cryptomoneda services.