SEC Withdraws Previous Accounting Guidance for Cryptocurrency Assets

President Trump’s administration is already taking steps to transform the digital assets landscape with the issuance of a new Executive Order and the SEC’s recent reversal of prior accounting guidance for crypto assets. On January 23, 2025, President Trump signed the “Strengthening American Leadership in Digital Financing Technology” Executive Order, directing federal agencies to establish a regulatory framework for digital assets. This same day, the SEC’s Division of Corporation Finance and Office of the Chief Accountant released Staff Accounting Bulletin (SAB) 122, effectively rescinding the Biden Administration’s SAB 121 and marking the first move by the SEC to roll back existing accounting guidance specific to the digital assets industry.

SAB 122 was issued shortly after the launch of a task force by SEC Acting Chairman Mark T. Uyeda, aimed at developing a comprehensive regulatory framework for crypto assets. Led by SEC Commissioner Hester Peirce, the task force’s objective is to establish regulatory guidelines, paths to registration, and disclosure requirements to regulate the digital assets industry with a focus on decreased enforcement.

The previous accounting guidance, SAB 121, was issued in March 2022 to provide guidance on safeguarding crypto-assets held by platform users. It required companies to present liabilities on their balance sheets to reflect obligations related to safeguarding crypto-assets for platform users. SAB 121 also mandated detailed disclosure of technological, legal, and regulatory risks associated with safeguarding crypto-assets, including specifics on each significant crypto-asset being safeguarded and the identity of individuals responsible for key protection and recordkeeping.

Critics of SAB 121 argued that it created unreasonable and industry-specific accounting challenges, deviating from standard custodial asset principles in other industries. They highlighted that the approach of SAB 121 could force custodial entities to raise substantial funds to maintain asset-to-liability ratios and unnecessarily jeopardize customers’ crypto-assets in insolvency situations.

In rescinding SAB 121, the SEC clarified that companies must still follow generally accepted accounting principles (GAAP) and IFRS standards to evaluate risks and liabilities related to safeguarding crypto-assets. The SEC emphasized the importance of proper financial reporting and disclosure to allow investors to understand entities’ obligations related to the safeguarding of crypto-assets.

The rescission of SAB 121 under SAB 122 offers increased flexibility to banks and traditional financial institutions engaged in or interested in providing crypto-custody services. By reverting to the application of GAAP and IFRS accounting standards, the SEC is signaling a shift in its historical treatment of digital assets, likely leading to further changes in the regulation of the industry.