SAB 121: What It Required and Why the SEC Rescinded It

Staff Accounting Bulletin No. 121 was SEC staff guidance that required companies safeguarding crypto-assets for customers to record those holdings on their own balance sheets as a matched liability and asset at fair value. It is no longer in effect. The SEC rescinded it through Staff Accounting Bulletin No. 122 on January 23, 2025, and companies apply the rescission on a fully retrospective basis for annual periods beginning after December 15, 2024.¹

What SAB 121 Required

The bulletin told any company holding crypto-assets on behalf of platform users to make two entries on its balance sheet: a liability representing the obligation to protect the assets, and a corresponding “safeguarding asset,” both measured at the fair value of the crypto held.² Both entries had to be remeasured whenever the market value of the underlying crypto changed.

That treatment broke sharply from how custody normally works. When a bank holds stocks, bonds, or mutual fund shares for a client, those assets sit off the bank’s balance sheet because the bank has no ownership interest. SAB 121 took a different path for crypto, and the SEC staff justified it by pointing to three categories of risk: technological (a compromised private key can mean irreversible loss with no central authority to reverse the transaction), legal (courts had little precedent for how custodied crypto would be treated in fraud, theft, or bankruptcy), and regulatory (far fewer rules governed crypto custody than traditional securities custody).²

Who Had to Comply

The bulletin applied broadly across SEC-reporting entities. That covered companies reporting under the Securities Exchange Act of 1934, companies with registration statements filed or submitted under the Securities Act of 1933 (including issuers in the middle of an IPO), issuers under Regulation A, foreign private issuers listing on U.S. exchanges, and private companies whose financials appeared in SEC filings through mergers involving shell companies or SPACs.²

The trigger was functional. If the entity or its agents safeguarded crypto-assets for platform users and maintained the cryptographic keys needed to transfer them, the guidance applied. Publicly traded crypto exchanges, financial institutions offering crypto custody, and any SEC reporter that touched customer crypto keys fell within scope.

Why It Mattered for Banks

The on-balance-sheet mandate created an outsized problem for banks because federal regulators require banks to hold capital against every asset on their balance sheet. Once SAB 121 forced recognition of a safeguarding asset for every dollar of crypto held in custody, it triggered leverage and risk-based capital requirements that ordinarily do not apply to custodial assets. A bank holding $1 billion in customer Bitcoin had to treat it, for capital purposes, as if the bank owned $1 billion in additional assets.

Traditional custody works nothing like that. Corporate bonds or mutual fund shares held for a client stay off the balance sheet and require no capital cushion. The one-to-one asset-to-liability ratio made crypto custody dramatically more expensive than custody of conventional instruments, and it priced most traditional banks out of the market. That left the business concentrated among crypto-native firms with less regulatory oversight.

Case-by-Case Relief Before the Rescission

SEC staff granted some entities individual relief. BNY Mellon received a “no-objection” letter allowing it to safeguard digital assets like Bitcoin and Ether without recording them as balance-sheet liabilities, based on its use of segregated crypto wallets designed to keep customer assets separate from the bank’s own estate in insolvency.

The SEC also outlined two categories of relief more generally. For bank holding companies, the requirements included obtaining both state and federal regulatory approval, maintaining bankruptcy-remote wallet structures, limiting activities to custodial functions without rehypothecation, and securing an outside legal opinion confirming customer assets would not enter the bank’s receivership estate. For introducing broker-dealers, relief applied when the broker-dealer had no control of private keys and crypto was held by a third-party agent of the customer under a direct contractual relationship. Both paths required legal opinions and detailed operational controls, and neither solved the structural problem for the broader banking industry.

Congressional Pushback and the Veto

The Government Accountability Office concluded that SAB 121 met the legal definition of a “rule” under the Congressional Review Act, meaning the SEC should have submitted it to Congress for review before implementation.³

Lawmakers introduced H.J.Res. 109 to overturn the bulletin under the CRA’s disapproval process. The resolution passed the House 228–182 on May 8, 2024, and the Senate 60–38 on May 16, 2024, with bipartisan support in both chambers. President Biden vetoed it, arguing the bulletin was necessary for investor protection and financial stability. A House override attempt on July 11, 2024, fell short at 228–184.⁴

How the SEC Rescinded SAB 121

What Congress could not accomplish through the CRA, the SEC did six months later. On January 23, 2025, the SEC issued Staff Accounting Bulletin No. 122, which formally rescinded the interpretive guidance in SAB 121 and removed Topic 5.FF from the Staff Accounting Bulletin Series.¹

The rescission takes effect on a fully retrospective basis for annual periods beginning after December 15, 2024. Companies filing 2025 annual reports present their financial statements as if SAB 121 never existed. Companies can also elect to apply the rescission in earlier interim periods included in SEC filings after the effective date.

What Accounting Applies Now

Companies safeguarding crypto for customers no longer automatically record a liability and matching asset at fair value. They apply the standard loss-contingency framework under ASC 450-20, the same rules that govern any uncertain future obligation.¹ Under ASC 450-20, a company records a loss only when it is probable a loss has been incurred and the amount can be reasonably estimated. If a loss is reasonably possible but not probable, the company discloses the contingency in footnotes without a balance-sheet entry.

In practice, most crypto custody arrangements return to off-balance-sheet treatment, consistent with how traditional custodial assets have always been handled. Companies that previously recorded safeguarding liabilities and assets under SAB 121 should remove those entries and disclose the cumulative effect of the accounting change, including adjustments to the opening balance of retained earnings for the earliest period presented.¹

Disclosure obligations did not disappear. SAB 122 reminds entities that existing rules still apply, including Regulation S-K Items 101 (business description), 105 (risk factors), and 303 (management’s discussion and analysis), along with ASC Topic 275 on risks and uncertainties.¹ Companies holding customer crypto are still expected to explain the nature and risks of those activities. The information now lives in footnotes and risk-factor sections rather than on the face of the balance sheet.

What the Rescission Did Not Change

The risks that motivated SAB 121 are still present. Legal uncertainty over customer crypto in bankruptcy proceedings remains largely unresolved. In In re Celsius Network LLC, a federal bankruptcy court ruled in January 2023 that over $4.2 billion in crypto deposited into interest-bearing “Earn” accounts belonged to the bankruptcy estate, not to customers, because Celsius’s terms of use transferred ownership of deposited crypto to the company. In In re BlockFi Inc., the court reached the opposite conclusion for non-interest-bearing customer wallets, finding that title stayed with customers under that platform’s different terms. Whether a customer’s crypto survives a custodian’s bankruptcy still depends heavily on the specific terms of service, the type of account, and the jurisdiction.

For anyone evaluating a company that custodies crypto-assets, the key disclosures have moved location but not importance. Risk-factor sections, management discussion and analysis, and contingent-liability footnotes are now where the relevant information sits. Companies with segregated wallets and clear contractual terms protecting customer ownership look different from those without such protections. The accounting is simpler after SAB 122; the due diligence is not.

1
Securities and Exchange Commission. Staff Accounting Bulletin No. 122
2
Securities and Exchange Commission. Staff Accounting Bulletin No. 121
3
U.S. Government Accountability Office. Securities and Exchange Commission – Applicability of the Congressional Review Act to Staff Accounting Bulletin No. 121
4
Congress.gov. H.J.Res.109 – 118th Congress (2023-2024)