The end of the SAB 121 crypto accounting liability mandate

The SEC rescinded SAB 121 in January 2025 through the issuance of SAB 122. This ended the March 2022 mandate that required custodians to record crypto assets as balance sheet liabilities. The SEC issued SAB 122 after receiving feedback from major banks and cryptocurrency firms. Under that old rule, a bank safeguarding $1 billion in Bitcoin had to report an equivalent $1 billion liability. This created a bizarre accounting quirk where banks reported massive liabilities for assets they did not actually owe. I find the previous requirement for a one-to-one liability treatment to be a wasteful accounting hurdle. This rule created a competitive disadvantage because crypto-native custodians operated under different accounting frameworks. It also increased liability-to-capital ratios, which could trigger higher capital reserve requirements under Basel III. Congress tried to stop the rule in May 2024 with H.J.Res. 109, but President Biden vetoed the resolution. The GAO also ruled that the SEC should have submitted SAB 121 to Congress for review before it took effect. Most SEC-reporting entities finished their initial implementation of the new rules by early 2026.

New rules for bank custodians

SAB 122 replaced the mandatory liability recognition with risk-based assessments under ASC 450-20 or IAS 37. Institutions now evaluate the probability of loss rather than the full asset value. If an institution determines there is a 5% probability of loss on $100 million in assets, they recognize a $5 million contingent liability. This shift allows banks to enter the market without the automatic capital penalties that existed under the old framework. The SEC issued SAB 122 on January 23, 2025, to align crypto custody accounting with standard practices for other assets like securities or commodities, which helps remove the discriminatory framework that existed under the previous guidance. You know the impact of balance sheet inflation on capital requirements. Entities must apply SAB 122 on a fully retrospective basis for annual periods beginning after December 15, 2024. On adoption, entities should recognize an adjustment to the opening balance of retained earnings to cover differences in carrying amounts. Early adoption is permitted in any interim or annual period after the effective date of January 30, 2025.

What remains for stablecoin reserves and banks?

Banks still need regulatory approval from the OCC, FDIC, or Federal Reserve before they offer these services. They must also maintain specialized key management, transaction monitoring, and segregation of customer assets. Stablecoin regulation continues to move forward, with final rules expected to clarify custody requirements for reserves. Institutions must still satisfy Regulation S-K Item 101, Item 105, and Item 303. They also manage disclosures under ASC 275 for crypto valuation uncertainties and assess loss contingencies under ASC 450-20. If an entity controls the digital assets, they are the accounting owner and must recognize the assets and a liability for the obligation to return them. I find that the requirement to maintain specialized infrastructure for transaction monitoring and key management remains a heavy operational burden. Banks must also comply with Bank Secrecy Act requirements for AML/KYC. Institutions must also evaluate insurance coverage for cyber risks and operational failures. The GENIUS Act and other legislation continue to shape the regulatory landscape. Will the need for regulatory approval from agencies like the Federal Reserve prevent banks from fully integrating with crypto-native firms?