SAB 121

Jana is reading older financial statements from a firm that held bitcoin for customers. She finds a liability alongside an asset of similar size. Why both, if the coins belong to customers? The answer may involve SAB 121, SEC staff accounting guidance effective April 11, 2022. SAB stands for Staff Accounting Bulletin. It addressed accounting for responsibility for safeguarding entrusted crypto-assets. Today it needs to be read as historical guidance, later rescinded by SAB 122, rather than as a continuing requirement. [1]

Imagine a platform obliged to protect customers’ BTC and the information needed to transfer them. That includes private keys: secret information that allows a payment to be authorized. SAB 121 also considered safeguarding through agents. The firm’s actual obligations mattered, rather than simply calling a service a “wallet.” Buying bitcoin for its own holdings does not by itself create this situation either. The guidance concerned entities within the described scope of financial reporting to the SEC, not automatically every wallet in the world. [1]

A balance sheet shows recognized assets and how they are financed, including liabilities. SAB 121 described a safeguarding liability measured at the fair value of customers’ crypto-assets, a valuation under the relevant accounting rules, and a corresponding asset. SEC staff made an important clarification in 2024: that asset was separate from entrusted BTC. The accounting entry does not itself transfer ownership of customers’ coins to the custodian. Jana therefore cannot simply add it to bitcoin the firm bought for itself. [4]

Consider our own simplified historical example. A firm safeguards 100 BTC valued at USD 60,000 each, a total of USD 6,000,000. In this model it records a safeguarding liability and a corresponding asset, each for that amount. No additional hundred bitcoins or cash in a bank account have appeared. Equity is the difference between assets and liabilities; equal increases in both do not themselves increase equity. The example sets aside loss effects and other accounting adjustments. It shows why the size of an accounting item alone tells us nothing about the firm’s earnings. [1]

In September 2024, SEC Chief Accountant Paul Munter described consultations about particular banking and other arrangements that fell outside SAB 121 on the facts presented. He spoke in his official capacity but noted that the views were his own, not necessarily those of the Commission. The legal custody arrangements and protection of customer assets were among the relevant circumstances. This was not an automatic exemption for every bank. Jana would need to know the details of the service; a broad headline about an exemption would not settle the position of another firm. [4]

SAB 122 is dated January 23, 2025 and effective January 30, 2025. It rescinded the earlier guidance and specified how to reflect the change in financial statements: fully retrospectively for annual periods beginning after December 15, 2024. Retrospective application means adjusting the relevant accounting information, not changing past movements of money. Entities could also elect earlier interim or annual periods in filings after effectiveness. Jana therefore needs to distinguish the document’s date, its effective date and the period covered by the statements. Rescission itself did not release any cash. [3]

Removing this accounting treatment does not mean a custodian can no longer have a liability arising from the loss of customers’ coins. SAB 122 points to assessing such risks under the firm’s accounting framework. Under US generally accepted accounting principles, US GAAP, the relevant guidance is ASC 450-20; under International Financial Reporting Standards, IFRS, it is IAS 37. These govern when and how much to recognize for possible losses associated with existing obligations. Their criteria differ: the result is neither automatic zero recognition nor a figure that can be carried from one framework to the other without further assessment. [2]

Jana should also read the notes to the financial statements, where the firm explains the reported figures. SAB 122 reminds entities of continuing disclosures about safeguarding customers’ crypto-assets and the effects of the accounting change. Rescinding SAB 121 alone does not establish solvency, the ability to meet obligations, or remove the risk of losing BTC. Nor does it settle every licensing or capital requirement. A useful question is therefore: what does the firm actually safeguard, what risks arise from that responsibility, and how does it explain them in its accounts? [2]