What Are SAB 121’s Crypto Accounting Requirements?

In early 2022, the U.S. Securities and Exchange Commission (SEC) staff released Staff Accounting Bulletin 121 (SAB 121), creating an accounting framework for companies that safeguard crypto-assets for their users. The bulletin’s purpose was to enhance financial reporting transparency by highlighting the risks involved when a company holds digital assets for others, representing a departure from traditional accounting for custodial services. This guidance was short-lived, as the SEC issued SAB 122 on January 23, 2025, which officially rescinded SAB 121. The reversal came after feedback from stakeholders who found the bulletin’s requirements operationally challenging and capital-intensive.

Entities and Assets Subject to the Guidance

When effective, SAB 121 applied to a specific set of entities and assets. The guidance was directed at SEC-reporting companies that provide services enabling users to hold and transact in crypto-assets, where the company has an obligation to secure those assets. This scope primarily captured crypto exchanges, digital asset custodians, and other platforms maintaining the cryptographic key information needed to access a user’s holdings.

The bulletin defined “crypto-asset” broadly, including assets like Bitcoin and Ethereum recorded on a cryptographically secured distributed ledger. The determining factor was not the asset type but whether the entity had an obligation to protect it for a user, exposing the entity to risks of loss or theft.

Balance Sheet Recognition Requirement

The primary requirement of SAB 121 was its mandate for on-balance-sheet recognition of custodied crypto-assets. Traditionally, assets held by a custodian for a client are not recorded on the custodian’s balance sheet because the custodian does not own them. SAB 121 departed from this principle by requiring entities to present a liability and a corresponding asset for the crypto-assets they safeguarded.

An entity had to recognize a “safeguarding liability” on its balance sheet, measured at the fair value of the crypto-assets held for users. Concurrently, the entity was required to recognize a “safeguarding asset” for an equal amount. Both the asset and the liability were to be re-measured at fair value each financial reporting period, with changes flowing through the income statement.

This mark-to-market requirement meant crypto market volatility would directly impact the balance sheets of safeguarding entities. For example, a company holding $1 billion of customer bitcoin would add a $1 billion liability and a $1 billion asset to its balance sheet.

Mandatory Financial Statement Disclosures

SAB 121 also required extensive disclosures in the notes to the financial statements to supplement the new balance sheet items. These disclosures were designed to offer qualitative and quantitative details about an entity’s crypto-asset safeguarding activities. Entities were required to disclose information on:

• The nature and amount of the crypto-assets held for users, with separate reporting for each significant crypto-asset.
• The entity’s vulnerability to risks specific to its safeguarding activities, such as loss from theft, fraud, or technological failure.
• Whether the custodied assets were held in separate, segregated accounts for each user or were commingled.
• Potential legal or regulatory risks that could affect the entity’s ability to fulfill its safeguarding obligations.

Impact on Regulatory Capital

The on-balance-sheet recognition mandated by SAB 121 had consequences for regulated financial institutions, particularly banks. For these entities, regulatory capital is a component of their financial health, representing a cushion to absorb unexpected losses. Capital requirements are calculated as a percentage of a bank’s total assets.

By forcing banks to record custodied crypto-assets on their balance sheets, SAB 121 inflated their total assets. This inflation negatively impacted key capital metrics, such as the leverage ratio, because a higher asset base requires more capital. To remain compliant, a bank would need to allocate its own capital against assets it did not own, making crypto custody an economically unattractive business line.

This treatment was a primary driver of industry opposition, with critics arguing it barred well-regulated banks from offering crypto custody services at scale. The capital implications were a central theme in the feedback provided to the SEC that contributed to the decision to rescind the guidance.