What Was SAB 121? A Deep Dive Into the SEC Rule Now Repealed

The U.S. Securities and Exchange Commission (SEC) introduced Staff Accounting Bulletin No. 121 (SAB 121) on March 31, 2022, as part of its efforts to regulate the accounting practices of entities involved in safeguarding digital assets. While the bulletin aimed to enhance transparency and risk management, it quickly became a subject of contention in the financial industry due to its stringent requirements. On January 23, 2025, the SEC rescinded SAB 121 under the Trump administration, replacing it with SAB 122, which allows for more flexible accounting practices for digital assets.

Key Aspects of SAB 121

SAB 121 established specific guidelines for entities engaged in safeguarding digital assets, particularly cryptocurrencies. These included:

Scope

Applicable to entities filing with the SEC under U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Targeted businesses with custodial obligations for digital assets, such as exchanges and financial institutions.

Recognition and Measurement

Required entities to recognize a safeguarding liability and a corresponding asset on their balance sheets. The liability and asset had to be measured at the fair value of the custodied digital assets.

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Disclosure Requirements

Entities were required to provide detailed disclosures regarding their custodial activities, including:

• The nature and amount of the safeguarded crypto-assets, with separate disclosures for significant digital assets.
• Vulnerabilities arising from concentrated safeguarding activities.
• Fair value metrics for the safeguarding liability and asset.
• Information on recordkeeping practices, cryptographic key management, and other safeguarding responsibilities.

Effective Date

For SEC filers, the rule took effect for interim or annual reporting periods ending after June 15, 2022, with retrospective application.

Controversy Surrounding SAB 121

Critics of SAB 121 pointed to its significant impact on financial institutions holding crypto-assets for customers. Key objections included; the requirement to recognize safeguarding liabilities and assets added burdensome accounting procedures, critics argued that the guidance deterred banks and other entities from offering crypto custody services due to the increased capital and compliance demands,bipartisan lawmakers and industry groups opposed the rule, calling it overly rigid and counterproductive to innovation.

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Rescission of SAB 121 and Introduction of SAB 122

The SEC’s decision to rescind SAB 121 reflects a notable shift in its regulatory approach under the Trump administration. SAB 122, introduced on January 23, 2025, eliminates the requirement to record safeguarded digital assets as liabilities. Instead, financial institutions can now:

• Account for potential risks, such as theft or fraud, as contingent liabilities.
• Exercise greater discretion in determining their safeguarding obligations and accounting practices.

Implications of the Repeal

The repeal of SAB 121 and the issuance of SAB 122 mark a significant step toward easing regulatory constraints on the crypto industry. Key benefits include; financial institutions can now manage digital assets without the burdensome requirements of SAB 121. By reducing barriers, the new guidance fosters a more favorable environment for crypto-related services.

Conclusion

SAB 121 represented a stringent attempt to regulate digital asset custody, but its controversial nature ultimately led to its repeal. The SEC’s shift to SAB 122 underscores a broader pro-crypto stance that prioritizes flexibility and innovation. This change is likely to accelerate the integration of cryptocurrencies into the mainstream financial system, empowering U.S. banks and institutions to play a more active role in the rapidly evolving digital asset ecosystem.

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FAQs

What was SAB 121, and why was it introduced?

SAB 121 was a rule introduced by the SEC in March 2022 to regulate the accounting practices of entities that safeguard digital assets. It required companies to recognize safeguarding liabilities and assets on their balance sheets, aiming to enhance transparency and risk management in the handling of crypto-assets.

Why was SAB 121 controversial?

SAB 121 faced criticism for its stringent requirements, particularly the burdensome accounting procedures for financial institutions holding crypto-assets. Many argued that it discouraged banks and other entities from offering crypto custody services due to the increased capital and compliance demands.

What are the implications of the repeal and the introduction of SAB 122?

The repeal of SAB 121 and the introduction of SAB 122 allows financial institutions more flexibility in managing digital assets. It removes the requirement to record digital assets as liabilities, instead allowing for the accounting of potential risks as contingent liabilities, facilitating greater crypto adoption.