1. Overview of SAB 121
2. Expert Opinions
3. Conclusion and Next Steps

The United States Securities and Exchange Commission (SEC) continues to stand firm on a rule that limits the use of crypto custody services for regulated financial firms.

Overview of SAB 121

On September 9, SEC Chief Accountant Paul Munter addressed a banking conference to discuss the agency’s regulatory stance on accounting for crypto assets. He referenced Staff Accounting Bulletin No. 121 (SAB 121) and its applications, stating that the SEC staff’s views remain unchanged. According to the SEC, absent specific mitigating facts and circumstances, an entity should record a liability on its balance sheet to reflect its obligation to safeguard crypto-assets held for others. SAB 121 was introduced in March 2022, outlining accounting guidelines for institutions looking to custody crypto assets.

Expert Opinions

ETF Store President Nate Geraci said in a September 10 X post that the SEC 'appears dug in' on SAB 121. In his view, they simply do not want to provide regulated financial institutions with the ability to custody crypto assets. On the other hand, SEC Commissioner Hester Peirce, who opposes the rule, stated that she continues to be concerned about both the substance and the process of SAB 121.

Conclusion and Next Steps

The US House of Representatives voted to overturn the controversial SEC guidance in May, but President Biden vetoed the repeal the following month. The SEC is reviewing various accounting scenarios involving blockchain and crypto assets, acknowledging that not all arrangements fit the proposed guidelines set out in SAB 121. Companies safeguarding crypto with bankruptcy protection may not need to record liabilities on their balance sheets. Similarly, broker-dealers facilitating crypto transactions without controlling the cryptographic keys may also not be required to record liabilities.

Ongoing debates and legislative initiatives show that the issue of how financial institutions should account for crypto assets remains relevant. Future changes and possible exceptions to current rules can be expected.