SAB 121 Summary and Its Latest Developments

A Fresh Start for Crypto Accounting

For many in the crypto industry—particularly U.S.-based founders and finance managers—the introduction of SAB 121 in 2022 felt like a step backward. Mandating that custodians of crypto-assets recognize both a liability and a corresponding asset at fair value, the guidance was criticized as overly restrictive and disconnected from what the space needed.

Now, with the introduction of SAB 122, there’s a sense of cautious optimism. For many, this marks a significant regulatory shift. So, what does SAB 122 mean for you? Whether you’re a founder juggling compliance burdens or a finance manager managing the complexity of crypto custody, this article unpacks the evolution from SAB 121 to SAB 122, the key changes, and what they mean for the future of crypto accounting in the United States.

Overview of SAB 121

Introduced by the SEC on March 31, 2022, Staff Accounting Bulletin (SAB) 121 established stringent accounting requirements for entities safeguarding crypto assets. It mandated recognizing liability for crypto custodial obligations and a corresponding asset at fair value. These measures aimed to address the unique risks associated with digital assets, such as cryptographic key security and regulatory uncertainties.

Transition to SAB 122

On January 24, 2025, the SEC rescinded SAB 121 and replaced it with SAB 122. This shift marked a transition to a more flexible regulatory framework for crypto-asset accounting. SAB 122 eliminates the controversial “gross-up” accounting approach, aligning liability recognition with standard contingency accounting principles (ASC 450-20/IAS 37).

Bottom-Line Analysis

SAB 122 represents a significant regulatory recalibration. It simplifies compliance for crypto custody entities while maintaining robust disclosure requirements. This regulatory shift reduces operational burdens, encourages innovation, and signals the SEC’s intent to balance oversight with the growing needs of the digital asset industry.

What is SAB 121?

SAB 121 was issued by the SEC to establish accounting and disclosure guidelines for entities safeguarding crypto-assets. It responded to the growing prevalence of crypto-assets held by financial institutions and the associated risks.

Key Provisions
Entities safeguarding crypto-assets were required to:

• Recognize custodial obligations as liabilities.
• Record corresponding assets at fair value.

Rationale
The guidance aimed to mitigate risks such as custodial insolvency and legal uncertainties. However, its rigid requirements sparked criticism from both industry and regulatory stakeholders.

Applicability and Impact of SAB 121

Scope
SAB 121 applied to all entities filing under U.S. GAAP or IFRS standards, particularly targeting those providing custodial services for crypto-assets. This included banks, fintech companies, and crypto-native custodians handling cryptocurrencies, stablecoins, and digital tokens. The wide applicability meant that even non-crypto companies exploring digital assets were affected if they safeguarded such assets for clients.

Implementation Timeline
Introduced in March 2022, SAB 121 was effective for financial periods ending after June 15, 2022. Many financial institutions scrambled to comply within the short implementation window, requiring rapid adjustments to their accounting systems and financial disclosures.

Criticism and Challenges
The mandatory recognition of liabilities and assets at fair value complicated the financial reporting process. Organizations faced issues such as:

• Operational Complexity: The need to calculate fair value for volatile crypto-assets added significant burdens.
• Accounting Inconsistencies: Unlike traditional custodial services, where assets remain off the custodian’s balance sheet, SAB 121 treated crypto assets as liabilities due to custodial risks.
• Institutional Reluctance: Banks and financial institutions hesitated to enter the crypto custody market, citing SAB 121’s punitive requirements as a deterrent.

Timeline of Legislative and Industry Pushback

SAB 121’s introduction sparked widespread debate across industries and the legislative landscape. Initially presented as a safeguard for crypto investors, it quickly became evident that its implications extended far beyond its intended purpose. Here’s how the story unfolded:

2022: Early Friction
Financial institutions raised alarms over SAB 121’s impact. Crypto custodians such as Coinbase and traditional banks like JPMorgan voiced concerns about the requirement to account for customer-held crypto assets as liabilities. Industry leaders argued that the guidance unfairly equated crypto custodianship to custodial responsibility, implying risks that didn’t exist under secure storage arrangements.

2023: Escalation and Advocacy
By mid-2023, advocacy groups, accounting firms, and industry coalitions began lobbying for SAB 121’s revision. Organizations such as the Blockchain Association submitted detailed reports outlining the unintended consequences of financial innovation.

2024: Legislative Battle
Both the House and Senate passed resolutions to overturn SAB 121 in mid-2024, highlighting its chilling effect on crypto innovation. Proponents of the resolutions pointed to reports of declining institutional interest in crypto custody services. Despite bipartisan support, President Biden vetoed the resolution, preserving SAB 121 temporarily.

January 2025: Regulatory Shift
The turning point came with the new administration’s emphasis on fostering innovation in digital finance. President Trump’s January 23, 2025 Digital Assets Executive Order, and on January 24, 2025, the SEC rescinded SAB 121 through SAB 122, signaling a shift in regulatory priorities.

Debanking No More

Amid the growing debate over SAB 121, traditional banks struggled to adapt, remaining mired in skepticism and operational inertia. Much of this hesitation stemmed from prudential regulators’ warnings against expanding crypto services. Documents obtained through a Freedom of Information Act (FOIA) request, initiated by Coinbase, revealed that U.S. regulators had informally discouraged banks from embracing crypto services, even while officially denying any policy of “debanking.” This practice, often referred to in the crypto industry as “Chokepoint 2.0,” further complicated institutional adoption during SAB 121’s tenure.

Rescission of SAB 121 towards SAB 122

Official Withdrawal and New Guidance
SAB 121 was officially rescinded on January 24, 2025, following months of deliberation. SAB 122 replaced it with a framework rooted in contingency accounting principles (ASC 450-20/IAS 37), marking a departure from the blanket “gross-up” accounting requirements.

Implications of SAB 121 Rescission

Introduction: Broader Implications
The rescission of SAB 121 reflects a pivotal moment for the crypto industry, financial institutions, and regulators. It signals the SEC’s willingness to adapt its policies to accommodate technological innovation without compromising oversight.

Implication for Financial Institutions

• Simplified Compliance: Financial institutions, including banks, can now provide crypto custody services without the fear of balance sheet inflation.
• Example: Fidelity Investments, already a leader in crypto custody, can expand its services under the less restrictive SAB 122 framework, potentially lowering operational costs.

Effects for the Crypto Industry

• Encouraged Innovation: With SAB 122, crypto-native firms can focus on developing custody solutions without being constrained by burdensome accounting requirements.
• Example: Coinbase Custody, which faced challenges under SAB 121, can now allocate resources to innovation and scaling its institutional offerings.

Implication for Regulators

• Balanced Oversight: SAB 122 demonstrates the SEC’s commitment to aligning regulatory frameworks with market realities, fostering confidence among stakeholders.
• Example: By embracing contingency accounting, the SEC has set a precedent for future digital asset regulations, paving the way for international collaboration.

Key Questions about Staff Accounting Bulletin

Why was SAB 121 rescinded?

Critics argued that SAB 121’s requirements were unnecessarily stringent, deterring innovation and adoption. The SEC recognized these concerns and shifted to a more balanced approach.

What does SAB 122 require?

SAB 122 allows entities to recognize liabilities only when a contingency, such as a loss, is probable and can be reasonably estimated. This change eliminates the automatic recognition of custodial obligations.

What disclosures are still required?

While SAB 122 reduces the reporting burden, entities must still provide detailed disclosures about their custodial arrangements, including risk mitigation strategies and compliance measures.

How does SAB 122 impact auditors?

Auditors now have more clarity, as liability recognition depends on standard contingency principles, reducing ambiguity in assessing crypto custodial risks.

The new Administration has taken decisive action to reshape the regulatory landscape for crypto and digital assets. Through an executive order titled “Strengthening American Leadership in Digital Financial Technology,” the Administration aims to bolster U.S. leadership in the digital asset space—encompassing cryptocurrencies, digital tokens, and stablecoins. This order not only repealed a previous executive order and its associated Treasury framework but also set the stage for the SEC’s repeal of Staff Accounting Bulletin (SAB) 121, marking a pivotal shift toward a more innovation-friendly regulatory approach.

What Comes After SAB 122 Enforcement?

The introduction of SAB 122 is just the beginning. As the crypto industry continues to evolve, so too must regulatory frameworks. Key areas for future development include:

• International Alignment: Coordination between the SEC and global regulators to establish uniform standards for digital asset accounting and custody.
• Technological Integration: Encouraging innovation in custody solutions, such as multi-signature wallets and blockchain-based auditing tools.
• Stakeholder Collaboration: Continued engagement with financial institutions, crypto firms, and accounting professionals to refine regulations.

The rescission of SAB 121 and the implementation of SAB 122 offer a glimpse into a regulatory landscape that balances innovation with oversight. As digital assets gain prominence, the industry must prepare for the next wave of regulatory challenges and opportunities.

Useful Resources

• SAB 121 and SAB 122 Details
• Understanding SAB 122 and Its Impact on Crypto Accounting
• Pro-Crypto Policies Surge​
• KPMG Insights Digital Assets EO​
• a16z SEC Guidance on Crypto
• ​The Truth of Debanking Digital Assets