Yesterday the U.S. Securities and Exchange Commission (SEC) rescinded SAB 121. The staff accounting bulletin required companies to put digital assets under custody as an asset and a liability on their balance sheet, a highly unorthodox treatment.
Given assets under custody belong to clients, they do not belong on the balance sheet. Prudential regulations relating to bank balance sheets meant the guidance blocked banks from providing custody for either cryptocurrency or digital securities. In the last few months the SEC allowed some exceptions on a case-by-case basis.
A lot of time was burned on the topic, as the Government Accountability Office (GAO) determined that SAB 121 warranted a Congressional review. The House and Senate voted to rescind it, but President Biden used a Presidential veto.
The SEC published SAB 122 which rescinds SAB 121. The new bulletin notes that companies should assess the risk of loss relating to their custody activities and put that assessed amount as a contingent liability on the balance sheet. This is similar to how banks create a contingent liability for potential haircuts against loans they have advanced. As a trained accountant, I can vouch that this as the consistent way to treat such risks in compliance with accounting rules. SAB 121 was the opposite.
However, SAB 121 was in place at a critical time in the crypto industry – the launch of Bitcoin ETFs. It remains to be seen whether banks can recover lost ground. SAB 121 also prevented U.S. banks from fully engaging in tokenization activities, with Germany, Japan and Switzerland leading the way. Now it’s time to catch up.
The new guidance comes less than a week after Commissioner Uyeda took over as acting SEC Chair, and on the same day that the President published his executive order on financial technology, including digital assets.
