SEC Rescinds Crypto Asset Accounting Guidance

Cryptocurrency investors welcomed a regulatory shift this week from the U.S. Securities and Exchange Commission (SEC), but the innovation this new policy fosters prompts warnings that supporters should be careful what they wish for. 

No longer will companies holding cryptocurrency assets on behalf of clients have to record these holdings as liabilities on their balance sheets thanks to the withdrawal of Staff Accounting Bulletin No. 121 (SAB 121). It also enhances the risk-reward aspect of crypto by making it more akin to everyday commodities, opening the door for both bigger payouts and greater market volatility. 

The evolution of SAB 121 and its criticism

SAB 121, introduced in 2022, was designed to address the technological, legal and regulatory risks unique to cryptocurrency. It mandated that custodians of crypto-assets recognize liabilities tied to their safeguarding obligations, ensuring transparency and accountability.

The policy, however, faced considerable opposition from financial institutions and the broader crypto industry, which argued that it imposed excessive compliance costs and discouraged banks from offering crypto custody services due to inflated balance sheets and heightened capital requirements.

Legislative and industry pressure against SAB 121 culminated in bipartisan resolutions to overturn the guidance in 2024. President Joe Biden vetoed them. But the new administration under President Donald Trump has signaled a more crypto-friendly stance.

The introduction of Staff Accounting Bulletin No. 122 (SAB 122), which rescinds SAB 121, reflects this shift. SAB 122 advises entities to follow established accounting principles for contingencies rather than imposing specific liability recognition rules for crypto-assets.

Implications of the new policy

The SEC’s move to rescind SAB 121 has been met with mixed reactions. On one hand, it is viewed as a significant step toward fostering innovation and broader adoption of cryptocurrencies. On the other hand, it raises concerns about the potential risks to investors and market stability.

The case for a net-positive impact

• Encouraging banking participation: By eliminating the requirement to record custodial crypto-assets as liabilities, the new policy reduces compliance burdens for banks and other financial institutions. This change could make it more feasible for banks to offer crypto custody services, providing clients with secure and regulated options for storing digital assets. Increased institutional involvement may also bolster the legitimacy and accessibility of the crypto market.
• Regulatory flexibility: SAB 122’s reliance on existing accounting principles allows companies to tailor their risk management practices without being constrained by a one-size-fits-all directive. This approach may encourage innovation by reducing barriers to entry for firms seeking to provide crypto-related services.
• Industry reception: Perry Woodin, founder of NODE40, a leading platform for crypto accounting, said the SEC's decision unlocks the unrealized potential of cryptocurrency, allowing investors to collateralize it via the banking industry in an effort to create more growth and wealth. "You've got a lot of really happy bankers today." 

Risks to investors and market stability

Despite its potential benefits, the withdrawal of SAB 121 introduces several risks that could undermine investor confidence and market integrity:

• Reduced transparency: SAB 121 required companies to clearly account for the risks and obligations tied to custodial crypto-assets. Without this mandate, investors may find it harder to assess the financial health and exposure of institutions holding digital assets.
• Weakened safeguards: The previous guidance incentivized companies to strengthen risk management practices to address hacking, fraud and operational errors. With the rollback, there is less regulatory pressure to prioritize these safeguards, potentially exposing investors to greater risks.
• Market instability: Removing the requirement for custodial liabilities may encourage institutions to hold larger volumes of crypto-assets without proportionate capital buffers. This could amplify systemic risks during periods of market volatility, with cascading effects on investors.
• Ownership uncertainty: SAB 121’s emphasis on liability recognition clarified ownership rights in scenarios such as bankruptcy or operational failures. The new policy’s broader approach may lead to disputes or confusion over asset ownership, leaving investors vulnerable in high-stress situations.
• Erosion of investor confidence: The crypto market has often been criticized for its lack of regulation and transparency. Easing requirements for institutions could reinforce perceptions of inadequate oversight, potentially deterring risk-averse investors.

Leadership and regulatory shifts

The SEC’s policy reversal coincides with a significant leadership change. Gary Gensler, known for his rigorous stance on crypto regulation, stepped down as SEC Chair on January 20, 2025. President Trump has nominated Paul Atkins, a former SEC commissioner with a pro-crypto reputation, as Gensler’s successor.

In the interim, Republican Commissioner Mark Uyeda has been appointed acting SEC Chair, while Commissioner Hester Peirce, a vocal advocate for clearer crypto regulations, leads a newly established crypto task force within the SEC.

Balancing innovation and investor protection

The SEC’s withdrawal of SAB 121 represents a pivotal moment for the cryptocurrency industry.

While the change may unlock new opportunities for institutional participation and innovation, it also places a greater burden on companies to implement internal controls and transparency measures voluntarily. For investors, the rollback underscores the need for caution and due diligence when selecting custodians for their digital assets.

As the SEC refines its approach under new leadership, the broader impact of SAB 122 will depend on how effectively companies balance innovation with the need to safeguard investor interests. Only time will tell whether this policy shift will serve as a catalyst for sustainable growth or a source of heightened risk in an already volatile market.