Why SAB 121 Repeal Matters

Good morning. Today we’re going to look at what the repeal of SAB 121 means for digital asset custody.

The election of President Donald Trump in the United States has already sparked executive actions that are set to reshape global financial services regulation. From the repeal of key policies to the formation of a new crypto task force, we’ll be delving into how these moves could transform the industry.

Every Wednesday, we’ll spotlight an article exploring the intricate value chain within the global custody sector. And each Friday, we’ll bring you a curated roundup of the most important news and insights affecting our industry. Stay tuned for fresh perspectives and timely updates!

Why does SAB 121 repeal matter?

The repeal of SEC accounting rule SAB 121 removes a major regulatory barrier that previously discouraged banks and financial institutions from offering digital asset custody services. By eliminating the requirement to list client-held crypto assets on their balance sheets, institutions can now avoid inflated capital reserve costs and operational burdens. This change aligns crypto custody with traditional asset custody standards, fostering greater institutional participation, enhancing U.S. competitiveness in global markets, and accelerating mainstream adoption of digital assets. The banks that are well advanced in their digital asset custody business lines will be the winners here.

What was the SAB 121 rule?

SAB 121, issued by the SEC in 2022, mandated that financial institutions holding crypto assets for clients record those assets as both liabilities (reflecting obligations to return them) and assets (representing custody control) on their balance sheets. This “double entry” treatment diverged from standard custodial practices, forcing institutions to allocate capital reserves against the full value of client assets. The rule applied even though custodians did not own the assets, creating disproportionate financial and regulatory challenges.

What is SAB 122?

SAB 122 is the SEC accounting rule that repealed and replaced SAB 121.

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How did it differ from how other assets are treated?

Traditional custody arrangements for assets like stocks, bonds, or commodities require custodians to hold client assets in segregated, off-balance-sheet accounts. These assets do not appear on the custodian’s balance sheet, avoiding capital reserve penalties. Under SAB 121, digital assets were uniquely treated as on-balance-sheet items, subjecting custodians to higher capital costs and regulatory scrutiny. The same dollar value of other asset classes would not have attracted the same treatment for very clear and well-understood reasons - especially the importance of segregating firm assets from client assets.

What does it mean for digital asset custody?

The repeal enables custodians to treat digital assets like traditional custodial holdings. Institutions can now:

• Apply risk-based liability accounting (e.g., reserving 0.5–5% of asset value for operational risks instead of 100%).

• Avoid balance sheet inflation, freeing capital for service expansion.

• Offer crypto custody without fear of violating prudential regulations like Basel III.

• Compete globally with jurisdictions like Germany and Japan, which already use off-balance-sheet frameworks.

• Clients also benefit from stronger legal protections, as segregated assets are shielded from custodian bankruptcy—a protection SAB 121’s on-balance-sheet approach had undermined.

Key Takeaways

• Regulatory alignment: Crypto custody now follows standards used for traditional assets, reducing operational complexity.

• Lower costs: Institutions save capital reserves previously tied to on-balance-sheet requirements.

• Market growth: Global custody banks can safely enter the crypto custody space, driving institutional adoption.

• Legal clarity: Client assets are better protected in bankruptcy scenarios under off-balance-sheet segregation.

• Global competitiveness: U.S. firms can now challenge overseas leaders in tokenization and digital asset services.

What’s next?

For the next few Wednesday editions, we’ll keep exploring digital assets in more detail and how they are very different from other asset classes when it comes to global custody and what institutional clients will need from an asset servicing viewpoint. We’ll keep sending our industry news and insights roundup every Friday.