On 23 January 2025, the Securities and Exchange Commission (SEC) repealed the infamous Staff Accounting Bulletin (SAB) 121 with the publication of the already much-lauded SAB 122.[1] With President Donald Trump taking office on 20 January 2025, and with his embrace of crypto demonstrated through—among other things—the appointment of crypto-friendly staff and cabinet members and the issuance of the Executive Order “Strengthening American Leadership in Digital Financial Technology” (Crypto Executive Order),[2] it should come as no surprise that Acting SEC Chairman Mark Uyeda, newly appointed leader of the new Crypto Task Force; Commissioner Hester Peirce (aka “Crypto Mom”); and the broader SEC team opted to repeal SAB 121.
For context, SAB 121 was an interpretive guidance issued by the SEC in March 2022 to SEC-reporting companies, like large publicly traded banks, stating that entities holding crypto assets in custody on behalf of customers should record customer crypto holdings as liabilities on their balance sheets and measure this liability—both at initial recognition and at each reporting date—at fair value. The guidance undermined existing accounting practice whereby assets held in custody were previously not required to be recorded on a custodian’s balance sheet and, in reversing this tradition, had the unintended impact of imposing a major operational burden on banks. This operational burden was twofold: (1) It exponentially impacted the quantum of regulatory capital imposed on the bank given that regulatory capital is assessed based on a bank’s balance sheet and the risk of the assets in question; and (2) the requirement to “measure crypto asset liabilities at fair value during each reporting period” exacerbated the unpredictability of capital requirements given the volatility associated with crypto assets.[3] Consequently, as it was operationally infeasible for SEC-reporting banks to comply with SAB 121, most chose to forgo providing crypto asset custody altogether.
In addition to the operational challenges associated with SAB 121 compliance, lawmakers and industry participants raised serious concerns about the broader implications of SAB 121, including:
- Financial Systemic Risk: By preventing large, well-regulated banks (i.e., SEC-reporting banks) from offering crypto custody while having no power to stop smaller, less reputable, and less regulated institutions from providing crypto custody, SAB 121 would serve to exacerbate the very problem it was seeking to cure. As noted by the American Bankers Association, Bank Policy Institute (BPI), Securities Industry and Financial Markets Association (SIFMA), and Financial Services Forum in their Joint Comments to the SEC regarding SAB 121: “If regulated banking organizations are effectively precluded from providing digital asset safeguarding services at scale, investors and customers, and ultimately the financial system, will be worse off, with the market limited to custody providers that do not afford their customers the legal and supervisory protections provided by federally-regulated banking organizations.”[4] In a similar vein, the House Financial Services Committee stated that by overturning SAB 121, consumers are protected by removing roadblocks “preventing highly regulated financial institutions and firms from acting as custodians of digital assets.”[5]
- Concentration Risk: Further, Representative Mike Flood (R-NE) expressed concern before the House Financial Services Committee that the absence of banks acting in a custodial capacity for approved BTC and ETH exchange-traded products (ETPs), despite this being “a role they regularly play for most other ETPs,”[6] creates concentration risk with only a small number of non-bank and non-SEC-reporting entities serving as custodians for the majority of BTC and ETH ETPs.
- Regulatory Overreach: The Government Accountability Office (GAO)[7] and House Financial Services Committee Chair Patrick McHenry[8] critiqued the SEC for failing to submit SAB 121 for congressional review prior to allowing the rule to take effect, instead implementing SAB 121 without notice and without public consultation.
- Overbroad Terminology: The broad definition of “crypto asset” in SAB 121 fails to draw a distinction between cryptocurrencies that exist on public, permissionless blockchains (e.g., Bitcoin) and traditional financial instruments that leverage blockchain networks and distributed ledger technology (DLT) to expedite banking services. Lawmakers worry that this regulatory uncertainty creates a chilling effect on innovation in the U.S. banking sector.[9]
Implications of the Repeal
With the repeal of SAB 121, banks that had to put their digital asset business strategies on pause in 2022 due to the operational infeasibility of compliance are now in a position to restart those efforts, while those banks that may have previously been crypto-risk averse may be more emboldened to explore digital-asset-related offerings. New crypto-related business efforts are poised to spike at banks, ushering in an era of greater crypto adoption.
Several Wall Street CEOs have already signaled a desire to expand their digital asset offerings in the face of a friendlier regulatory environment, with Morgan Stanley, Bank of America, and Goldman Sachs all voicing an interest in adapting their business to take advantage of the promise associated with digital assets.[10]
With banks poised to enter the realm of crypto custody, it’s likely that digital asset native incumbents will face competition, and we might start to see some market differentiation whereby the crypto natives will pivot to primarily serve token foundations/newer protocols and venture capital firms, while traditional financial services firms will increasingly serve institutional and retail investors whose portfolios are mostly composed of more mainstream digital asset holdings like Bitcoin. However, with increased competition, we might also see more consolidation, as banks may seek to acquire crypto custodians that have the technological capabilities to securely provide custody of crypto assets, while banks have the broader customer base, staff/resources, and governance frameworks requisite for widescale adoption. Either way, we hope that the repeal of SAB 121 and the broader Crypto Executive Order will spur innovation both among banks and digital asset natives as they seek to differentiate their product offerings, and we look forward to helping banks as they navigate this exciting new chapter in regulatory clarity.
How K2 Integrity Can Help
With the repeal of SAB 121, K2 Integrity can support banks as they look to expand their crypto/digital-assets-related business offerings:
- Bespoke training on digital assets and the relevant risks for the board, senior leadership, and across all three lines of defense.
- Investment integrity, including investment and third-party due diligence support at scale on potential custodian acquisition targets, sub-custodial partners, and new digital asset bank leadership.
- Asset due diligence at scale on compliance, market, operational, and reputational risks associated with an asset prior to custody/support for the asset(s) in question.
- Financial crime compliance (FCC) risk and controls gap assessments, new product risk assessments, and FCC program development from the ground up for banks seeking to develop their own crypto custody and trading solutions.
- Source of wealth/provenance analysis for large crypto deposits to prevent FCC risk.
Additionally, please see the recently published K2 Integrity expert insight article “Fiat Ramps Unlocked: Practical Tips for Banks and Crypto Firms” for banks looking to expand their crypto-related product offerings.
Speak to K2 Integrity representatives from the Crypto and Digital Asset Solutions Practice to learn more.
[1] U.S. Securities and Exchange Commission (23 January 2025), “Staff Accounting Bulletin No. 122,” https://www.sec.gov/rules-regulations/staff-guidance/staff-accounting-bulletins/staff-accounting-bulletin-122.
[2] The White House (23 January 2025), “Executive Order: Strengthening American Leadership in Digital Financial Technology,” https://www.whitehouse.gov/presidential-actions/2025/01/strengthening-american-leadership-in-digital-financial-technology/.
[3] For one of the best analyses on the impacts of SAB 121, see Zach Wong of Uniswap Labs (7 August 2023), “A Comprehensive Explanation of SAB 121 and How It Prevents Safe Crypto Custody,” https://zachrwong.info/a-comprehensive-explanation-of-sab-121-and-how-it-prevents-safe-crypto-custody.
[4] American Bankers Association (14 February 2024), “Joint Comments to SEC on Staff Accounting Bulletin No. 121,” https://www.aba.com/advocacy/policy-analysis/joint-comments-to-sec-on-sab-121.
[5] Financial Services Committee (6 May 2024), “Rep. Flood Testifies in Support of H.J.Res. 109 to Overturn SEC’s SAB 121,” https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=409242.
[6] Ibid.
[7] Government Accountability Office (31 October 2023), “Securities and Exchange Commission—Applicability of the Congressional Review Act to Staff Accounting Bulletin No. 121,” https://www.gao.gov/products/b-334540.
[8] Financial Services Committee (31 October 2023), “McHenry, Lummis Release Statement Following GAO Determination on Staff Accounting Bulletin 121,” Press Releases, https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=409017.
[9] Financial Services Committee, “Rep. Flood Testifies in Support of H.J.Res. 109.”
[10] MacKenzie Sigalos (24 January 2025), “Trump Crypto Plans Have Wall Street CEOs Ready to Jump into Digital Assets,” CNBC, https://www.cnbc.com/2025/01/24/trump-crypto-plans-have-wall-street-ceos-excited-about-digital-assets.html.
