What is SAB 121 and How Could It Impact Crypto Adoption in the US?

The Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 121 is a controversial rule that was introduced in 2022. The rule has significant implications for crypto adoption, particularly in the context of cryptocurrency custody by banks.

SAB 121 has had quite a lot of pushback, and just this week (February 2024) US legislators in both the House and Senate have taken steps to have the controversial rule revoked.

Let’s take a closer look at SAB 121 and why it’s considered problematic for mainstream cryptocurrency adoption.

1. Custody of Crypto: SAB 121 specifically addresses the custody of cryptocurrencies. It requires all companies that file with the SEC under U.S. GAAP or International Financial Reporting Standards to disclose crypto assets under custody as both an asset and a liability on their balance sheets. This has garnered criticism due to being at odds with the traditional accounting convention where assets under custody don’t belong to the custodian company and, therefore, shouldn’t appear on the balance sheet.
2. Definition of Crypto: Under SAB 121 crypto is defined as “a digital asset that is issued and/or transferred using distributed ledger or blockchain technology using cryptographic techniques.” This is quite a broad definition and includes stablecoins.
3. Impact on Banks: The rule has a substantial impact on banks because they are subject to capital requirements based on their balance sheets. For crypto custody, this means that banks must set aside a dollar of capital for every dollar of assets under custody. This capital requirement becomes a significant financial burden, making it expensive and, in many cases, unviable for banks to offer cryptocurrency custody services.
4. Concentration of Custody Services: Currently, a large portion of Bitcoin ETF crypto is custodied by platforms like Coinbase. This concentration raises concerns about the lack of diversity in custody services, potentially hindering consumer protection and creating a single point of failure in the ecosystem.
5. Capital Requirements and Viability: The capital requirements imposed by SAB 121 make it challenging for banks to provide custodial services for crypto-assets. For example, if a bank were to hold Bitcoin in custody for a significant ETF with billions in assets, it would have to set aside an equivalent amount in capital, which may not be financially feasible.
6. Industry Pushback: The banking industry, along with lawmakers and industry associations, has raised concerns about the impact of SAB 121 on the ability of well-regulated financial institutions to provide safe and sound custody of digital assets. They argue that limiting banks’ ability to offer these services leaves consumers with few well-regulated options, exposing them to potential risks.