The saga of SAB 121: Losing a battle, yet gaining ground

The lately concluded saga of Staff Accounting Bulletin 121 (SAB 121) is one of the more interesting tales in the long struggle for crypto acceptance.

On its face, SAB 121 was seemingly mild, not-legally-binding accounting guidance issued back in 2022 by the staff of the Securities Exchange Commission’s (SEC) Office of the Chief Accountant “express[ing] the views of the staff regarding the accounting for obligations to safeguard crypto assets an [SEC-regulated] entity holds for platform users.” Specifically, in the SEC’s view, safeguarding crypto assets for platform users gives rise to significant technological, legal and regulatory risks. Therefore, the staff determined “it would be appropriate” for financial institutions to report custodied crypto assets as a liability on their balance sheets.

But SAB 121 sparked a years’ long movement culminating in a showdown fit for a summer blockbuster. In the world of crypto regulation, the battle over SAB 121 is a gripping tale featuring industry backlash, rare bipartisanship, a presidential veto, and a failed attempt to overturn the veto. And, in July 2024, like a classic Hollywood epic, it closes with a redemptive epilogue that offers hope for a sequel.

SAB 121’s release triggers industry backlash

The saga began in March 2022 when the SEC Office of the Chief Accountant staff released a guidance document called Staff Accounting Bulletin 121 (SAB 121).

Interpretive guidance like this is not legally binding, but companies seeking to stay on government’s good side tend to treat agency guidance as rules. SAB 121 applies to certain entities that file reports pursuant to the Securities Exchange Act of 1934 (Exchange Act) and entities that have submitted or filed a registration statement under the Securities Act of 1933 (Securities Act) or the Exchange Act. The SAB also applies to entities submitting or filing an offering statement or post-qualification amendment thereto under Regulation A, entities subject to the periodic and the current reporting requirements of Regulation A, and private operating companies whose financial statements are included in filings with the SEC in connection with a business combination involving a shell company, including a special purpose acquisition company.

SAB 121 advised these financial institutions that if they hold crypto on behalf of customers (eg, centralized exchanges, banks) they should report their customer’s crypto as a liability on their balance sheets and include, in notes to their financial statements, a clear disclosure of the nature and amount of crypto assets that they are holding for platform users, with a separate disclosure for each significant crypto asset, and the vulnerabilities entities face due to any concentration in such activities. In other words, these firms would need to publicly disclose the amount and nature of crypto that they hold on behalf of their customers. See our initial coverage of SAB 121 in our April 2022 issue of Blockchain and Digital Assets News and Trends.

To the SEC staff, SAB 121 surely seemed like a no-brainer. Reporting a firm’s custodied crypto assets as liabilities to crypto owners would permit investors in these firms (and customers) to understand how exposed these firms are to crypto-specific risks. Such risks might include misplaced or compromised wallet keys or, perhaps ironically, legal uncertainty about the regulatory treatment of crypto assets. In the SEC staff’s view, the novelty and uncertainty surrounding crypto creates potential legal liability of which investors should be aware.

The industry, however, strongly disagreed. Among other reasons, reporting more assets on their balance sheets might trigger increased capital reserve requirements under separate regulations which the SEC does not administer. That could constrain lending or other income-producing activities, making crypto custody services economically infeasible for many firms, among them banks with valuable experience offering custody services. The industry fiercely resisted. It also found allies in members of Congress and SEC Commissioner Hester Peirce.

In a 2022 published statement, Commissioner Peirce argued that SAB 121 was “yet another manifestation of [the] Commission’s scattershot and inefficient approach to crypto.” Though she generally agreed such disclosures could be appropriate, she faulted the Commission for citing outdated data to justify its assessment of crypto-specific risks. She also charged that the SEC itself had played a “role in creating the legal and regulatory risks” by refusing, “despite many pleas over many years, to provide regulatory guidance about how [SEC] rules apply to crypto-assets.” She further objected to using this particular form of guidance to effect the change. Staff Accounting Bulletins, she noted, involve no “consulting with affected parties,” which, in Commissioner Peirce’s view, was especially inappropriate given the forceful language in SAB 121 that “reads as if” it is an enforceable rule.

Members of Congress attacked SAB 121 more directly. On July 15, 2022, Representative Trey Hollingsworth (R-IN) and several other members sent a letter to the SEC that we reported on in our August 2022 issue of Blockchain. The letter urged the SEC to retract SAB 121 because it appeared to conflict with guidance provided by the Office of the Comptroller of the Currency (OCC) – the prudential financial regulator for many banks – and would make bank “custody of digital assets economically infeasible,” ultimately harming consumers who would have fewer options for crypto custody services. The members argued that crypto assets, like other assets that banks custody, should remain off balance sheet, ensuring “consumers remain whole in the event of bankruptcy.” Like Commissioner Peirce, they called for notice and comment rulemaking that would permit public engagement.

SAB 121 debate cools with advent of crypto winter

Over the next several months, a string of high-profile bankruptcies seemed to vindicate the SEC staff’s position. After FTX collapsed, SEC Chair Gary Gensler suggested to Congress that the reporting guidelines in SAB 121 might protect future investors from similar collapses involving public companies. He did not, however, address the risk, playing out in courts across the country, that customers entrusting their crypto assets to firms might find themselves treated as unsecured creditors in bankruptcy proceedings. But as “crypto winter” set in, political will to challenge SAB 121 dissipated. While firms like Coinbase began complying with SAB 121, other firms, including banks, put crypto custody plans on hold.

In 2024, the winds shifted. Ten days into the new year, the SEC approved the first bitcoin ETFs. The historic approvals followed a ten-year legal battle that ended when the United States Court of Appeals for the District of Columbia reversed the SEC’s “arbitrary and capricious” rejection of a bitcoin ETF that Grayscale Investments had proposed.

But, like most ETFs, the bitcoin products required custodians to safeguard the underlying crypto assets. With the potential for more ETFs to win approval – for bitcoin and other digital assets – banks took a renewed interest in offering custody services for cryptocurrencies. As the crypto industry rallied, so too did support for abandoning SAB 121, setting the stage for a climactic third act.

Banks, state regulators, and Congress rally against SAB 121

By March 2024, a coalition of financial institutions, bipartisan members of Congress, and state banking regulators had mounted an all-out assault on SAB 121.

A joint letter from the Bank Policy Institute, American Bankers Association, Financial Services Forum, and the Securities Industry Financial Markets Association (SIFMA) contended that SAB 121 disparately prevented banking organizations, which are separately subject to prudential regulations, from offering digital asset services and products. As a result, they argued, consumers were denied the services of some of the safest, most experienced custody providers.

A letter from the Conference of State Bank Supervisors followed. The association of bank regulators from every state echoed concerns about increased capital reserve requirements which would reduce the number of firms offering custody services. They further argued that on-balance sheet treatment of crypto assets could expose customers to creditor claims if custodians enter bankruptcy because, in traditional bankruptcy proceedings, off balance sheet assets remain the property of the customer and cannot be used to satisfy a debtor’s debts.

And then the Government Accounting Office weighed in. Although the SEC had argued SAB 121 was not a “rule” subject to the CRA, the GAO rejected that position. This move paved the way for Congress to act, and it did, via HJ Res. 109, a bipartisan resolution under the Congressional Review Act (CRA) which permits Congress to review and disapprove agency rules.

HJ Res 109 resolution passed the House on May 8 and the Senate only eight days later. The resolution became the first ever crypto-specific legislation to pass both houses of Congress. Like all bills, however, it faced a final hurdle: presidential approval.

A presidential veto, and what came next

On May 3, 2024, President Joe Biden vetoed the resolution. In a message to Congress, he expressed concern that the resolution would “constrain” the SEC’s ability to “address future issues,” but stated eagerness to “work with the Congress to ensure a comprehensive and balance regulatory framework for digital assets.” To overturn a presidential veto, the House would need to marshal a supermajority, with at lest two-thirds voting in support of the resolution. That effort failed on July 11.

But the saga does not end there.

The details of the failed vote offer a sliver of hope. Though Democrats could not recruit enough support for the resolution, their reasons for rejecting it are intriguing. Representative Maxine Waters (D-CA), ranking member of the House Financial Services Committee, suggested that she acknowledged issues with SAB 121, but merely opposed using “a sledgehammer to fix an issue that may merely need a scalpel.” She further hinted that the SEC was already considering “targeted modifications to SAB 121,” which, in her view, removed the need for broad CRA legislation. In other words, even though the resolution failed to become law, a majority of legislators had voted for it, and even those who didn’t acknowledged SAB 121’s flaws.

Sure enough, on the same day as the failed vote, news outlets reported that “several” banks had met with the SEC and got the green light to ignore SAB 121, provided they implement other protections for their customers’ crypto assets.

There are myriad reasons why the SEC became so flexible on SAB 121; a hopeful interpretation is that crypto-forward Americans, acting through their elected representatives, made their voices heard. Those elected representatives are already at work on HR 5741, a bipartisan bill that would impose uniform accounting treatment for both digital and non-digital assets alike.

A more cynical explanation for the SEC’s flexibility, however, might arise from the Supreme Court’s recent decision in Loper Bright v. Raimondo (which DLA Piper covers here). Decided on June 28, 2024, only weeks before the SEC reportedly relaxed its interpretation of SAB 121, Loper Bright overturned 40 years of precedent that had applied broad deferential treatment to federal administrative agencies’ interpretations of their authorizing statutes. Under the new Loper Bright precedent, courts adjudicating challenges to agency interpretations, including guidance such as SAB 121, are charged with applying the “best reading” of a statute, rejecting prior case law that instructed courts to set aside their own interpretation of the statute. The Loper Bright decision makes express delegations of congressional authority a lynchpin for deference to agency interpretations. Companies challenging the SEC’s regulation of crypto have often cited the major questions doctrine as a limitation on the SEC’s delegation of authority. In the wake of Loper Bright, arguments based on the major questions doctrine are likely infused with renewed force.

In short, SEC may have acquiesced not in response to this saga’s protagonist, America’s crypto-forward consumers, but to the looming presence of an even greater threat to the Commission’s regulation of crypto assets.

Key takeaways

So, crypto advocates may have lost the battle, but they nevertheless have gained ground. Even though the resolution failed, it proved that crypto issues can reach a critical mass in Congress. It also may have influenced the SEC to conditionally back off of SAB 121.

This saga offers a few important lessons:

1. Crypto industry players often view large centralized financial institutions as anathema to crypto’s ethos of decentralization, permissionless finance, but large institutions chasing new opportunities following the SEC’s ETF approvals may be powerful allies for the crypto industry. We may be underestimating the knock-on effects of these ETFs.


2. Crypto remains a bipartisan issue. Fewer Democrats voted for the resolution than Republicans, but even those who didn’t support it appeared to acknowledge the burdens of the SEC’s guidance, and many (including the President) expressed hope for a regulatory framework that promotes innovation in the US.


3. Firms looking to provide crypto custody services, but avoid the burdens of SAB 121, may have an option to develop robust investor/customer protections and engage with the SEC.


4. In the wake of Loper Bright, we may see the SEC seek to engage with industry more actively, including in the form of more traditional notice and comment rulemaking, to avoid a Supreme Court challenge to its authority more generally.

Learn more about SAB 121 and SEC oversight of crypto, as well as the implications of Loper Bright, by contacting any of the authors.