Updated SEC Staff Accounting Bulletin Rescinds SAB 121 Crypto Accounting Guidance

Alert
January 27, 2025
3 minutes

On January 23, 2025, President Trump signed an executive order titled Strengthening American Leadership in Digital Financial Technology (Crypto EO), which addressed a variety of crypto-related topics to the great relief of many in the crypto industry. In a move that may or may not be coincidental, the Securities and Exchange Commission (SEC) rescinded controversial prior administration accounting guidance contained in Staff Accounting Bulletin 121 (SAB 121) that suggested that financial institutions must reflect client crypto assets they hold as balance sheet liabilities. In Staff Accounting Bulletin 122 (SAB 122), the SEC rescinded the guidance in SAB 121. In its place, SAB 122 reminds entities that have an obligation to safeguard crypto assets for others to determine whether to recognize a liability related to the risk of loss under such an obligation, and if so, the measurement of such a liability, by applying the recognition and measurement requirements for liabilities arising from contingencies set forth in existing Financial Accounting Standards Board (FASB) and International Accounting Standards (IAS) guidance.

Background

In March 2022, the SEC issued SAB 121, which was designed to articulate the views of the SEC staff regarding the accounting for obligations to safeguard crypto assets an entity holds for platform users. In the SEC’s view, certain SEC-regulated entities responsible for safeguarding crypto assets for their platform users may be subject to significant technological, legal and regulatory risks which make it appropriate for financial institutions (such as crypto exchanges and banks) to report as a liability on their balance sheets client crypto assets held in custody on behalf of customers. SAB 121 also suggested such financial institutions include, in notes to their financial statements, disclosure of the nature and amount of crypto assets held for clients (with separate disclosures for each significant crypto asset) and highlight any vulnerabilities they could face as a result. Although the guidance in SAB 121 was technically non-binding, SEC-regulated entities ignored such guidance at their peril.

Unsurprisingly, the crypto industry reaction to the issuance of SAB 121 was swift and negative. And the industry was not alone. The detractors included a bipartisan group in Congress, as well as Commissioner Hester Peirce, who noted that the SEC played a “role in creating the legal and regulatory risks” by refusing, “over many years, to provide regulatory guidance about how [SEC] rules apply to crypto assets.” Congress eventually passed a resolution under the Congressional Review Act canceling SAB 121, but President Biden vetoed the resolution. Nevertheless, after the U.S. Supreme Court decision in Loper Bright v. Raimondo, which overturned the doctrine under which courts would defer to the determination by a federal agency of the appropriate interpretation of ambiguous statutes, there have been reports that the SEC has allowed some entities to ignore SAB 121 provided they implement other protections for their customers’ crypto assets.

Key Takeaway from SAB 122

The biggest impact of SAB 122 relates to how financial institutions report liabilities. Under SAB 121, financial institutions were required to consider the full value of client crypto assets as liabilities. In contrast, under SAB 122, financial institutions need only consider the risk of loss of such assets calculated using their own data and risk assessments consistent with existing FASB and IAS guidance. As an example, a financial institution that holds $10 million in client crypto assets would have a balance sheet liability of $10 million under SAB 121. Under SAB 122, the balance sheet liability would be limited to the amount the financial institution determines to be at risk under its own risk models. If the financial institution determines that 5% of client crypto assets are at risk, the balance sheet liability would be limited to $500,000. With the elimination of the special rules for crypto firms impacted by SAB 121, their financials will now be subject to the same accounting standards as other industries, allowing them to reflect liabilities commensurate with the risks of holding client crypto assets.

The Prospect for Crypto Regulation Under the Trump Administration

The crypto industry has reacted favorably to the Crypto EO and various other Trump Administration crypto actions, including the SEC’s announcement that they are forming a new Crypto Task Force to be led by Commissioner Peirce. The rescission of SAB 121 eliminates some of the disparate treatment of crypto firms and bodes well for other future crypto actions by the new Administration.