SAB 121 crypto custody: what changed and why

For nearly three years, SAB 121 crypto custody guidance made it financially punishing for banks to hold digital assets for clients. SAB 121 required custodians to record crypto as an on-balance-sheet liability, driving up capital requirements and effectively keeping regulated banks out of the custody market. In January 2025, the SEC issued SAB 122, which rescinded that guidance.

This guide covers what SAB 121 required, why it was controversial, how the rescission happened, and what the change means for banks, custodians, and crypto companies going forward.

What was SAB 121 crypto custody rule?

Staff Accounting Bulletin No. 121 was issued by the SEC in March 2022. It applied to any entity that safeguards crypto assets on behalf of users, including exchanges, custodians, and banks.

The core requirement

SAB 121 required these entities to record a liability on their balance sheet equal to the fair market value of the crypto assets held in custody. A corresponding asset was also recognized, measured at the same fair value.

This sounds symmetrical, but the balance sheet impact was severe. Under traditional custody arrangements (for stocks, bonds, or other financial assets), client assets are held off the custodian's balance sheet. They belong to the client, not the custodian. The custodian discloses the arrangement but does not carry it as a liability.

SAB 121 broke from this precedent for crypto. The SEC staff argued that the unique risks of crypto custody (hacking, loss of private keys, regulatory uncertainty) justified on-balance-sheet recognition.

Staff believes that an entity that has an obligation to safeguard crypto-assets held for its platform users should present a liability on its balance sheet to reflect that obligation and a corresponding asset.

Why balance sheet treatment matters

For banks, carrying a liability on the balance sheet directly affects regulatory capital ratios. Banks must hold capital in proportion to their balance sheet liabilities. A bank custodying $10 billion in crypto under SAB 121 needed to hold additional capital against that entire amount, even though the crypto belonged to clients and the bank bore no credit risk.

This made crypto custody prohibitively expensive for banks. The capital cost wiped out the custody fee revenue. Most banks concluded it was not economically viable to offer crypto custody under these conditions.

Why the SAB 121 crypto rule was controversial

The opposition to SAB 121 came from multiple directions: banks, the crypto industry, Congress, and even government auditors.

The banking industry

Banks and custodians argued that SAB 121 created an unprecedented asymmetry. No other custodied asset class requires on-balance-sheet treatment. The American Bankers Association, the Securities Industry and Financial Markets Association (SIFMA), and individual banks submitted comment letters arguing the rule was fundamentally unfair.

The practical impact was clear: while crypto exchanges (Coinbase, Kraken) already custodied crypto and absorbed the SAB 121 impact, traditional banks, which many investors would prefer for custody, were effectively locked out.

Congressional opposition

Bipartisan opposition emerged in Congress. Lawmakers argued that SAB 121 was:

• Economically harmful: It prevented banks from competing in crypto custody, concentrating risk in less-regulated entities
• Procedurally improper: The SEC issued it as staff guidance, bypassing the formal rulemaking process required for rules of this significance
• Anti-competitive: It created an uneven playing field between banks and crypto-native custodians

In 2024, Congress passed a resolution under the Congressional Review Act to repeal SAB 121. President Biden vetoed the resolution, keeping the rule in place.

The GAO ruling

In October 2023, the Government Accountability Office (GAO) issued a decision finding that SAB 121 constituted a "rule" under the Congressional Review Act and should have been submitted to Congress for review before taking effect. This procedural finding strengthened the argument that the SEC had overstepped its authority.

The GAO determined that SAB 121 constituted a rule under the Congressional Review Act and should have been submitted to Congress for review before taking effect.

The 2025 rescission

In January 2025, the SEC issued SAB 122, which rescinded SAB 121. That changed the accounting path without requiring banks to wait for a new crypto custody law.

SAB 122 rescinds the interpretive guidance included in Topic 5.FF.

What triggered the change

Several factors converged:

• Growing bipartisan consensus that the rule was harming financial innovation
• Industry lobbying from both traditional banks and crypto companies
• The GAO ruling providing procedural pressure after finding SAB 121 should have been submitted to Congress

Effective date and transition

SAB 122 became effective on January 30, 2025. Entities that had been recording SAB 121 safeguarding obligations could stop applying that interpretive guidance and reassess the accounting treatment under the normal custody framework.

For banks that had been waiting on the sidelines, the rescission removed one of the clearest accounting barriers. It did not remove operational, compliance, insurance, or risk management work.

Impact on banks and financial institutions

The SAB 121 rescission is one of the most significant regulatory developments for institutional crypto custody in years. Here is what it changes.

Banks can now compete

With the automatic on-balance-sheet requirement removed, banks can revisit crypto custody on more viable terms. The custody fee revenue no longer needs to justify capital treatment based on the full fair value of client crypto. This gives regulated institutions a clearer path into a market previously dominated by crypto-native custodians.

Expected market changes

Before the rescission, crypto custody was concentrated among a smaller set of crypto-native and trust-company providers. Banks entering the market could increase competition, deepen institutional service options, and improve integration with existing treasury workflows.

Large banks bring advantages that crypto-native custodians cannot match: FDIC insurance (for cash), established compliance infrastructure, existing client relationships, and the trust that comes with centuries of custodial experience.

Capital treatment

After SAB 122, institutions no longer apply the SAB 121 model that automatically put the fair value of safeguarded crypto on the balance sheet. They still need to evaluate custody obligations, loss contingencies, disclosures, and regulatory capital treatment under the rules that apply to their business.

Impact on crypto companies and investors

More custody options

For crypto companies and institutional investors, the rescission can mean more choices for where to store digital assets. Bank custody comes with regulatory oversight, insurance frameworks, and counterparty stability that some investors require.

Institutional access

Several institutional allocators, including pension funds, endowments, and family offices, have internal policies requiring custody by a regulated bank or trust company. SAB 121 made that path harder because bank custody economics were unattractive. SAB 122 removes that accounting barrier.

What does not change

The SAB 121 rescission does not affect:

• Tax treatment of crypto (still property under IRS rules)
• Fair value accounting under FASB ASU 2023-08 (still applies to owned crypto)
• Anti-money laundering requirements for custodians
• Securities law classification of specific tokens
• State-level regulations for crypto custody

Accounting treatment after the rescission

With SAB 121 crypto custody guidance removed, accounting no longer starts from an automatic fair value safeguarding liability.

Off-balance-sheet for custodians

Custodied crypto belongs to the client, not the custodian. After SAB 122, entities determine whether a liability exists by applying existing contingency guidance and the facts of the custody obligation, rather than recording the full fair value of all custodied crypto by default.

Disclosure requirements remain

Custodians must still disclose the nature and extent of their custody activities, including:

• Total value of crypto assets under custody
• Types of crypto assets custodied
• Risks associated with custody activities
• Any restrictions on the custodian's operations
• Insurance coverage and loss protection measures

Interaction with FASB ASU 2023-08

Finance teams should separate custodied crypto from owned crypto:

• Custodied crypto (held for clients): evaluated under custody, contingency, and disclosure guidance after SAB 122
• Owned crypto (on the company's own balance sheet): measured at fair value under FASB ASU 2023-08, with gains and losses in net income. The company must also track cost basis for realized gain calculations on disposals.

A bank that both custodies client crypto and holds its own crypto must apply both frameworks correctly. Tokenbooks supports this distinction with separate tracking for owned and custodied assets.

Transition entries

Entities that recorded SAB 121 liabilities should evaluate transition entries under SAB 122, including retrospective application and required disclosures. A simplified reversal often starts with removing the safeguarding asset and liability created solely by SAB 121:

Account	Debit	Credit
Crypto custody liability	fair value of custodied assets
Crypto custody asset		fair value of custodied assets

This removes both the liability and the corresponding asset when they were recorded only because of SAB 121. Teams still need to assess any remaining loss contingency, disclosure, or contractual obligation.

How Tokenbooks supports custody-aware accounting

Tokenbooks gives finance teams a ledger-first way to keep owned assets, custody-wallet activity, valuation evidence, and reporting records separate.

Owned vs custody-wallet separation. Track assets the company owns separately from wallets or positions that represent custody, protocol custody, or other non-operating contexts. That separation helps reviewers apply the right accounting treatment.

Portfolio-scoped reporting. Keep entities, portfolios, wallets, and reporting periods organized so each reporting scope can be reviewed without mixing operating treasury, client-facing custody analysis, and DeFi position activity.

Fair value integration. For owned assets, Tokenbooks applies the FASB ASU 2023-08 fair value framework with multi-source price resolution. For custody-related records, fair value can support disclosure and review without forcing the owned-asset accounting path.

Audit trail. Asset movements, valuation sources, classifications, and reviewer decisions stay close to the ledger. Compliance teams get evidence for internal controls and external audit work.

Read our guide to digital asset accounting under FASB for the other major accounting standard change, or see our complete crypto accounting guide for a broader overview of the full accounting workflow.

Frequently asked questions

What did SAB 121 require?

SAB 121 required any entity safeguarding crypto assets for others to record a liability on its balance sheet equal to the fair value of the custodied crypto, plus a corresponding asset. This on-balance-sheet treatment increased capital requirements and made crypto custody economically unattractive for regulated banks and financial institutions.

Why was SAB 121 rescinded?

Congress and the crypto industry argued that SAB 121 unfairly penalized crypto custody compared to traditional asset custody, which generally stays off-balance-sheet. The guidance was also challenged procedurally because the SEC issued it without formal rulemaking. In January 2025, the SEC issued SAB 122, which rescinded the SAB 121 interpretive guidance.

Does SAB 122 mean banks will offer crypto custody?

The rescission removes the main accounting obstacle, but banks still need operational infrastructure, compliance programs, and risk management frameworks. Expect gradual rollout rather than immediate universal availability from traditional banking institutions.

How does SAB 121 relate to FASB ASU 2023-08?

They address different situations. SAB 121 was about custodied crypto (assets held on behalf of others). FASB ASU 2023-08 is about owned crypto (assets on your own balance sheet). The FASB standard requires fair value for owned crypto. SAB 122 removed the SAB 121 interpretive guidance for custody obligations.

What accounting treatment applies to custodied crypto after SAB 122?

After SAB 122, entities determine whether to recognize a liability by applying existing loss contingency guidance rather than automatically recording the fair value of all custodied crypto. Disclosure requirements remain, including information about custody services and related risks.

A new era for institutional crypto custody

The rescission of SAB 121 removes one of the largest accounting obstacles to institutional crypto custody. Banks can revisit custody economics, giving investors and companies more options for safeguarding digital assets.

Combined with FASB ASU 2023-08's fair value framework for owned crypto, the accounting infrastructure for digital assets is now substantially more rational and aligned with economic reality. Companies holding or custodying crypto have clear, workable standards for the first time.

Tokenbooks supports the ledger discipline these workflows require, helping teams separate owned crypto, custodied assets, fair value reporting, and audit evidence in one system.

If you need to separate owned crypto, custodied assets, fair value reporting, and audit evidence, start in Tokenbooks with one portfolio and one reporting workflow.