The Securities and Exchange Commission (SEC) has replaced SAB 121 with SAB 122, giving financial institutions a more flexible approach to reporting crypto asset custody liabilities. This regulatory shift addresses critical industry concerns that previously made crypto custody economically challenging for banks.
Under the old SAB 121, banks were required to record customer crypto custody assets as direct liabilities on their balance sheets—a mandate that effectively blocked many institutions from entering the digital asset custody market. The new SAB 122 allows financial institutions to apply standard contingency accounting principles, providing a more nuanced risk assessment framework.
The change follows intense lobbying from the financial and crypto sectors. In a bold legislative challenge, Representative Mike Flood’s H.J. Res. 109 sought to dismantle SAB 121, successfully navigating through both congressional chambers. Despite this momentum, President Biden’s veto halted the resolution, citing critical investor protection considerations.
SEC Commissioner Hester Peirce emerged as a key advocate for regulatory transformation, pushing for a more nuanced approach to cryptocurrency oversight. Her persistent efforts have signaled a potential strategic pivot in the SEC’s traditionally conservative cryptocurrency policy.
The new SAB 122 introduces a pragmatic framework that empowers financial institutions to assess crypto custody risks using established accounting methodologies. This regulatory recalibration could substantially reduce entry barriers for traditional banks seeking to expand into digital asset services, potentially catalyzing broader institutional crypto adoption.
Peirce, along with acting SEC Chairman Mark Uyeda, continues to lead a newly formed crypto task force aimed at developing more pragmatic regulatory frameworks for digital assets. The SAB 122 guidance signals a potential softening of the SEC’s historically restrictive stance toward cryptocurrency.
The new rule could significantly expand secure custody options for crypto investors, potentially reducing barriers to entry for traditional financial institutions looking to offer digital asset services. By treating potential crypto-related losses as contingent liabilities, banks now have a more economically viable path to entering the crypto custody market.
This regulatory update underscores the ongoing evolution of digital asset oversight, reflecting a growing recognition of cryptocurrency’s increasing mainstream financial relevance.
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