by
Victoria d’Este

Published: January 24, 2025 at 8:22 am Updated: January 24, 2025 at 7:25 am

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January 24, 2025 at 8:22 am

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A contentious accounting regulation that has caused a great deal of conflict in the banking and cryptocurrency industries has been revoked by the US Securities and Exchange Commission. Introduced in March 2022, Staff Accounting Bulletin (SAB) No. 121 required financial institutions that hold cryptocurrency on behalf of clients to record these assets as liabilities on their balance sheets. The SEC formally revoked this guideline on January 23, 2025, indicating a change in the regulatory landscape regarding digital assets.

The History and Purpose of SAB 121

When SAB 121 was first implemented, the crypto markets were under increased scrutiny. The law, which required businesses to record a liability and a matching asset for digital currency kept for clients, was designed to address perceived dangers related to custodial crypto assets. This approach was meant to ensure transparency and safeguard consumers in the event of insolvency or operational failures.

Critics countered that the law posed practical difficulties and misrepresented the nature of custody arrangements. In addition to making financial reporting more difficult, categorizing digital assets as liabilities discouraged businesses from using crypto custody services. The guidelines were viewed as a major obstacle to the banking industry’s further use of cryptocurrencies.

Industry Opposition to SAB 121

Financial institutions, legislators, and the cryptocurrency community all voiced strong opposition to the implementation of SAB 121. Leaders in the industry pointed out that the necessity to categorize client assets as liabilities went against what is customary for traditional asset custodians. The law, according to Representative Wiley Nickel, disadvantages U.S. institutions by limiting their ability to scale crypto-related services, such as exchange-traded products.

The influence of the rule was not limited to financial firms. Senator Cynthia Lummis and other critics said that SAB 121 hindered innovation in the digital asset market, making it more difficult for American companies to compete internationally. She said that the law “only stunted American innovation and advancement of digital assets and was disastrous for the banking industry.”

Attempts by Lawmakers to Overturn SAB 121

In Congress, efforts to repeal SAB 121 attracted support from both parties. Lawmakers enacted a resolution in 2024 to repeal the regulation. Despite this parliamentary victory, the resolution suffered a setback when then-President Joe Biden vetoed it, arguing that the SEC’s strategy was essential to preserving investor and consumer safeguards. The veto signaled a continued divide over how best to regulate digital assets in a rapidly evolving market.

This impasse was resolved following the 2025 presidential inauguration of Donald Trump, who campaigned on a platform that emphasized pro-crypto policies. Trump’s administration quickly moved to address the concerns raised by industry stakeholders, with the repeal of SAB 121 serving as a prominent first step.

Implications of the Repeal

A more general change in regulatory objectives is reflected in the SEC’s decision to revoke SAB 121. The updated framework allows businesses to use well-known accounting standards, such International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP), to evaluate crypto custodial duties. By bringing crypto custody procedures into line with those for conventional assets, this strategy lessens compliance requirements and promotes an atmosphere that is more conducive to innovation.

Advocates for the business have mostly praised the repeal. A strong advocate for the cryptocurrency industry, SEC Commissioner Hester Peirce, praised the action and emphasized the value of practical regulation. Peirce, the recently appointed leader of the SEC’s crypto task force, has promised to oversee digital assets in an open and cooperative manner.

New Opportunities for the Crypto Sector

U.S. financial institutions now have more opportunities to interact with cryptocurrency markets thanks to the repeal of SAB 121. Businesses are in a better position to provide custody services by reducing the reporting requirements required by the regulation, which allows for further involvement in the expanding digital asset ecosystem. Exchange-traded funds (ETFs) and other investment vehicles based on cryptocurrency may become more widely used as a result of this regulation reform, according to analysts.

According to Blockchain Association spokesperson Kristin Smith, the repeal “really opens up a whole new market.” She emphasized the possibility of boosting investor trust and creating cutting-edge financial solutions that were previously limited by regulatory ambiguity.

Balancing Innovation and Investor Protection

Although the crypto sector celebrates the repeal of SAB 121, it also highlights the continuous difficulty in striking a balance between investor protection and innovation. The significance of open disclosures and adherence to current rules has been emphasized by the SEC. The agency is still dedicated to making sure that market players follow the rules of accountability and fairness even as it modifies its stance on crypto-assets.

Hester Peirce’s leadership of the SEC’s crypto task group demonstrates her dedication to creating a regulatory framework that balances risk mitigation with innovation. In place of enforcement-led strategies, the task force seeks to engage and collaborate with industry stakeholders.

SAB 121’s repeal is a component of a larger change in U.S. policy on digital assets. A presidential working group has been established to promote crypto-friendly policies as part of President Trump’s administration’s proactive approach to crypto regulation. Initiatives like a national cryptocurrency reserve and steps to stop the emergence of a central bank digital currency (CBDC) will be discussed by this group.

The United States appears to be establishing itself as a leader in the global digital asset market based on these trends. Policymakers seek to achieve a balance that guarantees long-term growth and competitiveness by developing a regulatory environment that fosters innovation while protecting consumers.

The Future of Crypto Regulation

Although SAB 121’s withdrawal represents a major shift for the cryptocurrency sector, it also emphasizes how the regulatory landscape in this area is constantly changing. Regulators have to handle complicated problems pertaining to systemic risk, fraud prevention, and market stability as digital assets continue to gain popularity.

In the years to come, the emphasis will probably move to creating all-encompassing frameworks that take into account new developments like tokenization, blockchain-based payment systems, and decentralized finance. An important step in this approach has been taken by the SEC, which has decided to abolish SAB 121, demonstrating its readiness to accept innovation while maintaining the values of accountability and openness.

About The Author

Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.

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Victoria d’Este