Disclosure: The views and opinions expressed here belong solely to the author and do not represent the views and opinions of crypto.news’ editorial.
On January 23, 2025, President Donald Trump began delivering on his promise to transform the digital asset industry by supporting policies, rules, and regulations for the responsible growth and use of digital assets, blockchain technology, and related technologies across all sectors of the economy in order to secure America’s position as the world’s leader, by undertaking “Tokenization Friendly Initiatives.” These included:
- President Donald Trump issued an executive order, Strengthening American Leadership in Digital Financial Technology, which established a Working Group on Digital Asset Markets chaired by White House AI and crypto czar David Sacks (who shared his opinions here);
- The US Securities Exchange Commission revoked accounting rule SAB 121 that hindered financial institutions from custodying customer digital assets.
You might also like: The focus is on strengthening US leadership in crypto tech | Opinion
About SAB 121
Staff Accounting Bulletin 121 was issued by the SEC Staff on March 31, 2022, ahead of several bank failures involving exposure to the digital asset industry. It was issued in response to an increase in the number of entities providing digital asset custody services, which have unique technological, legal, and regulatory risks associated with them.
The rule required an entity to recognize a liability and corresponding asset at fair market value, or FMV, for its obligation to safeguard digital assets for customers. This balance sheet disclosure requirement, which did not apply to traditional assets—such as securities—held in custody, posed challenges for banks subject to regulatory reserve requirements. The rule significantly increased the financial burden on these financial institutions wanting to offer digital asset custody services, potentially deterring them from entering the market.
The rule also required entities to provide a significant number of detailed disclosures, both in the footnotes to the financial statements and outside the financial statements, about the nature and amount of digital assets being safeguarded and any risks related to concentrations in digital asset safeguarding. Such disclosures included information about who held the cryptographic keys, who maintained internal recordkeeping, and who was obligated to secure the digital assets and protect them from loss or theft.
Furthermore, the rule was not easy to use because it did not define safeguarding. Entities were often required to use significant judgment to determine whether a transaction fell within the rule’s scope.
For these reasons, traditional financial institutions did not favor SAB 121. It essentially created a significant barrier to offering digital asset custodial services, hindering tokenization innovation.
William Quigley, who began his career as a bank auditor ahead of becoming a cryptocurrency and blockchain investor and co-founder of WAX.io blockchain and stablecoin Tether (USDT), explained to me:
“SAB 121 placed a significant restraint on the ability of banks to maintain custody of cryptocurrency assets on behalf of customers by requiring a bank to reflect at FMV both an asset and a liability, for which it must reserve capital on its balance sheet even though it is not the owner of the digital asset. The rescission of SAB 121 will allow banks to tokenize.”
You might also like: Crypto and banking: tokenization of the global financial system is yet to come | Opinion
About SAB 122
Staff Accounting Bulletin 122 provides greater flexibility to banks and traditional financial institutions that provide or are interested in providing digital asset-custody services by returning to the pre-SAB 121 accounting principles and standards in reporting contingent liabilities under [ASC 450-202] or [IAS 373] in accordance with GAAP and IFRS Accounting Standards without requiring the one-to-one asset to liability ratio that SAB 121 imposed. Preliminary guidance provided by the Office of the Comptroller of the Currency around 2020 seemed thoughtful.
The SEC staff stresses that entities should continue providing clear and thorough disclosures about risks, obligations, and uncertainties related to safeguarding digital assets, which agencies in a joint statement in 2023 detailed for banks. “The FDIC looks forward to engaging with the President’s Working Group on Digital Asset Markets,” said acting chairman Travis Hill, who released 175 documents related to its supervision of banks that engaged in, or sought to engage in, digital asset-related activities.
Accordingly, SAB 122, which applies to annual periods beginning after December 15, 2024, with elective rescission in any earlier interim or annual financial statement period, does not completely absolve a reporting company from recognizing a liability relating to digital asset custodial activities of entities.
Conclusion
The Working Group on Digital Asset Markets includes SEC Acting Chairman Mark T. Uyeda, who launched a task force led by Republican Commissioner Hester Peirce charged with developing a “comprehensive and clear regulatory framework for digital assets.” The goal of this task force is to regulate “less through enforcement” and more through established regulatory guidelines, paths to registration, and disclosure requirements that will continue to drive institutional participation in tokenization and broader market growth.
These Tokenization Friendly Initiatives—including by the SEC task force—are welcomed by the world’s largest custodian Bank of New York (BNY), which indicated its intention to extend its custody services into digital assets, the American Bankers Association as well as “Etherealize.io, which connects financial institutions to the largest, secure, and open blockchain eco-friendly Ethereum ecosystem around the world” said Vivek Raman, the CEO of Etherealize.io.
Read more: US leadership in crypto: The focus is on stablecoins | Opinion
