SAB 121 Rescinded

The SEC’s Staff Accounting Bulletin No. 122 (SAB 122), issued on January 23, 2025, officially rescinds SAB 121, ending one of the most controversial financial reporting requirements for crypto custodians and exchanges.

Since its introduction in 2022, SAB 121 required companies safeguarding crypto assets to record them as liabilities on their balance sheets, alongside a corresponding asset entry. While intended to increase transparency on risks associated with digital asset custody, it had severe unintended consequences.

SAB 122: A Turning Point for Crypto Custody Accounting

With the issuance of SAB 122, the SEC returns to a principles-based approach, aligning crypto custody accounting with established US GAAP and IFRS standards.Instead of a blanket liability requirement, companies must now:
✅ Assess risk exposure related to crypto custody obligations.
✅ Determine if a liability should be recorded based on loss contingencies under ASC 450-20 (US GAAP) or IAS 37 (IFRS).
✅ Provide disclosures on risk, obligations, and exposure, ensuring financial statement transparency.

This marks a major shift away from prescriptive rule-based accounting to a framework allowing entities to apply professional judgment in assessing risk.

‍Source: Staff Accounting Bulletin No. 122 by SEC

From SAB 121 to SAB 122: What Has Changed?

SAB 122 eliminates unnecessary balance sheet inflation and regulatory complexity, creating a more sustainable framework for crypto custody.

‍Source: Deloitte Insights KPMG Insights

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Who Needs to Comply with SAB 122?

What’s Changing for These Companies?

• Crypto exchanges & custodians will no longer be required to recognize custodial assets as liabilities unless a specific loss risk exists.
• Financial institutions & banks may re-enter the crypto custody space as regulatory capital constraints ease.
• Web3 companies managing third-party funds will need to adopt clear internal controls for loss contingency assessments.

Traditional finance players are likely to expand crypto services, while Web3 businesses must refine their risk assessment frameworks to ensure compliance.

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Staying Audit-Ready & Compliant

With SAB 122 shifting liability assessments to a risk-based model, companies need structured processes to ensure accurate financial reporting and compliance:

• Implement automated transaction tracking to ensure all asset movements are accounted for.
• Reconcile custodial holdings with accounting ledgers in real time.
• Assess & document risk contingencies under ASC 450-20 or IAS 37.
• Maintain strong disclosures that provide clarity on risk exposure without unnecessary complexity.

Tools that automate reconciliation, financial reporting, and crypto invoicing can help businesses navigate these requirements efficiently. Ensuring compliance while reducing manual errors allows finance teams to focus on growth and strategy rather than administrative burdens.

The Road Ahead for Crypto Accounting Compliance

The rescission of SAB 121 and the introduction of SAB 122 mark a significant shift in the regulatory landscape for crypto custodians and financial institutions. By aligning with well-established U.S. GAAP & IFRS principles, the new approach reduces unnecessary complexity while maintaining transparency in financial reporting. Here’s how these changes will shape the future of crypto accounting compliance:

Eases Accounting Burdens for Crypto Custodians
Previously, SAB 121 required custodians to recognize safeguarded assets as liabilities, inflating balance sheets and increasing compliance costs. SAB 122 removes this blanket requirement, allowing custodians to only record liabilities when a risk of loss exists. This shift enables more accurate financial reporting and eliminates the operational headaches that came with forced liability recognition.

Encourages More Traditional Finance Players to Enter the Crypto Space
Many banks and financial institutions hesitated to enter the crypto custody market due to the capital reserve requirements and regulatory uncertainty introduced by SAB 121. With its repeal, traditional finance players now have a clearer, risk-based framework for accounting. This change will likely increase institutional participation in digital asset services, leading to greater adoption of crypto custody solutions by regulated financial entities.

Creates Better Alignment with U.S. GAAP & IFRS Standards
SAB 121 introduced a new and unconventional accounting treatment that diverged from traditional contingency-based financial reporting models. In contrast, SAB 122 adheres to long-standing accounting principles, specifically ASC 450-20 (U.S. GAAP) for contingent liabilities and IAS 37 (IFRS) for provisions and contingent assets/liabilities. By aligning with established financial reporting standards, SAB 122 enhances global consistency in how crypto custodial obligations are accounted for, reducing discrepancies in financial disclosures across jurisdictions.

Positions Web3 Finance for Broader Institutional Adoption
A significant barrier to institutional investment in crypto finance was the regulatory ambiguity and restrictive reporting requirements imposed by SAB 121. With the transition to SAB 122, Web3 companies now have a more structured and predictable financial framework, making it easier for institutional investors and corporate treasuries to participate.

Greater Clarity in Financial Reporting, Reducing Regulatory Friction
One of the key concerns with SAB 121 was the uncertainty it created—companies struggled to determine what qualified as custodial obligations and how to properly account for them. SAB 122 eliminates these ambiguities.