Crypto custody shake-up: How SEC & FASB are rewriting the rulebook for US banks

The Securities and Exchange Commission (SEC) has recently updated its guidance on the accounting treatment of crypto-assets held by entities for their platform users. This update involves the rescission of Staff Accounting Bulletin (SAB) No. 121 and the introduction of SAB No. 122.

Original Rationale for SAB 121

Issued in March 2022, SAB 121 provided interpretive guidance on accounting for obligations to safeguard crypto-assets held for platform users. The SEC staff observed an increase in entities offering crypto-asset transaction services and identified unique technological, legal, and regulatory risks associated with safeguarding these assets. To address these concerns, SAB 121 required entities to recognise a liability and a corresponding asset for the obligation to safeguard crypto-assets, measured at fair value.

Risks the SEC Aimed to Mitigate

The SEC sought to mitigate several risks through SAB 121:

Technological Risks: The potential for loss, theft, or misuse of crypto-assets due to cybersecurity breaches or technological failures.
Legal Risks: Uncertainties regarding the legal treatment of crypto-assets, especially in adverse events like fraud or bankruptcy.
Regulatory Risks: The evolving regulatory landscape for crypto-assets, which could impact the obligations and liabilities of entities holding these assets.

By recognising these risks on the balance sheet, the SEC aimed to enhance transparency and provide investors with better information about the potential liabilities associated with safeguarding crypto-assets.

Consequences for Banks Providing Custody Services

SAB 121 had significant implications for banks and broker-dealers offering crypto-asset custody services. By requiring the recognition of a liability equal to the fair value of the custodied crypto-assets, banks' balance sheets were substantially impacted. This recognition led to increased regulatory capital requirements, discouraging many institutions from providing crypto-asset custody services at scale.

Impact of Fair Value Accounting Compared to Other Assets Held by Banks

Unlike traditional bank assets such as loans typically held at amortised cost, SAB 121 mandated that crypto-assets be measured at fair value. This approach introduced volatility to financial statements, as the fair value of crypto-assets can fluctuate significantly. In contrast, assets held at amortised cost provide more stability, as they are recorded based on their original cost adjusted for any principal repayments and amortisation.

Additional Impact on Capital Given Risk Weights Applied to Crypto Assets

The recognition of crypto-assets at fair value increased the total assets on banks' balance sheets, leading to higher risk-weighted assets. Consequently, banks were required to hold more capital to meet regulatory requirements, potentially affecting their capital ratios and limiting their capacity to engage in other lending or investment activities.

Introduction of SAB 122

In January 2025, the SEC issued SAB 122, which rescinded the guidance provided in SAB 121. Under SAB 122, entities are no longer required to recognise a liability and corresponding asset for safeguarding crypto-assets. Instead, they should assess whether to recognise a liability related to the risk of loss by applying existing accounting standards for contingencies.

FASB's Intangible Assets Standard and Fair Value Approach

The Financial Accounting Standards Board (FASB) has been exploring the accounting treatment of intangible assets, including crypto-assets. Historically, intangible assets were recorded at cost and tested for impairment. However, recent developments indicate a shift towards a fair value approach, allowing entities to measure certain intangible assets, like cryptocurrencies, at fair value. This change aims to provide more relevant and timely information to investors, reflecting the current market conditions of these assets.

Comparisons to UK

Compared to the US, the UK’s regulatory and accounting approach to crypto-assets remains fragmented and relatively undeveloped. The Financial Conduct Authority (FCA) has introduced rules around crypto marketing and anti-money laundering (AML) compliance, but there is no specific UK equivalent to SEC SAB 121 or 122 governing the accounting treatment of custodied crypto-assets.

From an accounting perspective, UK firms generally follow IFRS standards, where crypto-assets are classified as intangible assets and measured at cost, subject to impairment testing—an approach that is increasingly seen as outdated.

While the UK government has signalled an interest in creating a more robust regulatory framework for digital assets, progress has been slow, and there is currently no dedicated crypto-accounting standard equivalent to the FASB's shift towards fair value measurement.

This lack of clarity has left UK financial institutions hesitant to fully engage in the crypto custody and services market, fearing regulatory uncertainty and inconsistent treatment under prudential capital requirements.