- SEC rescinds SAB 121 through new guidance SAB 122, changing how digital asset custody is reported on balance sheets.
- Previous requirement to list custodial digital assets as both assets and liabilities created barriers for banks entering the cryptocurrency sector.
- New guidance aligns with standard accounting practices, requiring only contingent liability reporting for potential custody risks.
- Change follows Congressional attempts to overturn SAB 121 and coincides with Acting SEC Chair Uyeda’s appointment.
- U.S. banks may now have opportunities to expand digital asset services, competing with international markets.
The U.S. Securities and Exchange Commission has modified its accounting guidance for digital asset custody, removing a significant regulatory barrier for financial institutions seeking to offer cryptocurrency services.
Accounting Standards Realignment
The new guidance, SAB 122, replaces the controversial SAB 121, which required companies to report digital assets under custody as both assets and liabilities on their balance sheets. This unusual requirement contradicted traditional accounting principles, as custodial assets typically remain off-balance-sheet since they belong to clients.
Regulatory Journey
The path to this change involved multiple regulatory bodies. The Government Accountability Office determined SAB 121 needed Congressional review, leading to House and Senate votes for its removal. Despite President Biden‘s veto of these efforts, the SEC has now independently revised its position through administrative action.
International Competition and Market Impact
While SAB 121 was active, countries like Germany, Japan, and Switzerland gained advantages in digital asset innovation, particularly in tokenization services. The timing of SAB 121 coincided with the launch of Bitcoin ETFs in the U.S., potentially affecting market development.
The updated guidance arrives as Commissioner Uyeda assumes the role of acting SEC Chair, marking a potential shift in the agency’s approach to digital asset regulation. Under the new framework, financial institutions must only report assessed risk amounts as contingent liabilities, similar to how banks account for potential loan losses.
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