SEC Rescinds Prior Accounting Guidance for Crypto Assets

President Trump’s promises to transform the digital assets landscape are already beginning to unfold through a series of executive orders and directives to federal agencies. On January 23, 2025, the same day that President Trump issued his “Strengthening American Leadership in Digital Financing Technology” Executive Order directing certain agencies to establish a regulatory framework for digital assets, the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance and Office of the Chief Accountant issued Staff Accounting Bulletin (“SAB”) 122, which rescinds the Biden Administration’s SAB 121 and marks the SEC’s first efforts to roll back existing accounting guidance specific to the digital assets industry. SAB 122 was issued two days after SEC Acting Chairman Mark T. Uyeda launched a task force charged with developing a “comprehensive and clear regulatory framework for crypto assets.” The stated goal of the task force, which is led by famously pro-crypto SEC Commissioner Hester Peirce, is to regulate “less through enforcement” and more through established regulatory guidelines, paths to registration, and disclosure requirements.

Background

In March 2022, the SEC Staff issued SAB 121—titled “Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for its Platform Users”—to provide accounting guidance to companies that were safeguarding crypto-assets held by their platform users. SAB 121 imposed an obligation to “present a liability on [their] balance sheet[s] to reflect [their] obligation to safeguard the crypto-assets held for [their] platform users.” SAB 121 also called for disclosure of specific technological, legal, and regulatory risks associated with safeguarding crypto-assets—including separate disclosures for each significant crypto-asset being safeguarded and the identity of the persons who held cryptographic keys, maintained internal recordkeeping of crypto-assets, or protected such assets from loss or theft.

Critics of SAB 121 argued that it created overly prohibitive and crypto-specific accounting and compliance challenges that were inconsistent with custodial asset principles in other industries. For example, critics pointed out that SAB 121 would require custodial entities to raise a significant amount of funds to maintain an adequate asset-to-liability ratio. Also, because assets posted on balance sheets are vulnerable to creditor claims, the approach of SAB 121 put customers’ crypto-assets unnecessarily at risk in insolvency and restructuring cases. Critics further denounced SAB 121 because, as SEC Staff interpretative guidance, stakeholders did not have an opportunity to comment, as they would have had through an SEC rulemaking process. 

In rescinding SAB 121, the SEC Staff clarified that companies that safeguard crypto-assets must still “determine whether to recognize a liability related to the risk of loss under such an obligation, and if so, the measurement of such a liability” pursuant to generally accepted accounting principles (“GAAP”) and IFRS accounting standards. The SEC Staff further reminded entities to continue considering existing disclosure requirements to “allow investors to understand an entity’s obligation to safeguard crypto-assets held for others,” including certain reporting requirements under Regulation S-K and accounting standards relating to risks and uncertainties.

Key Implications

SAB 122 provides greater flexibility to banks and traditional financial institutions that provide (or are interested in providing) crypto-custody services. The return to the pre-SAB 121 approach of applying GAAP and IFRS accounting standards to assess risks, disclosures, and financial reporting related to crypto-assets is a welcome development. The SEC is likely to take further steps that change its historical treatment of digital assets. 

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jorge deNeve, an O'Melveny partner licensed to practice law in California; Andrew J. Geist, an O’Melveny partner licensed to practice law in New York; James M. Harrigan, an O'Melveny partner licensed to practice law in the District of Columbia and Maryland; Michele W. Layne, an O’Melveny of counsel licensed to practice law in California; Robert Plesnarski, an O'Melveny partner licensed to practice law in the District of Columbia and Pennsylvania; Jim Bowman, an O'Melveny partner licensed to practice law in California; Pamela A. Miller, an O'Melveny partner licensed to practice law in New York; Steven J. Olson, an O'Melveny partner licensed to practice law in California; Mark A. Racanelli, an O’Melveny partner licensed to practice law in New York; Jennifer B. Sokoler, an O'Melveny partner licensed to practice law in New York; Meaghan VerGow, an O'Melveny partner licensed to practice law in the District of Columbia and New York; Bill Martin, an O'Melveny counsel licensed to practice law in New York; and Juan Antonio Solis, an O’Melveny associate licensed to practice law in Texas, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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