In a significant policy shift, the U.S. Securities and Exchange Commission (SEC) has withdrawn its controversial Staff Accounting Bulletin No. 121 (SAB 121) related to the accounting treatment of crypto assets. The move comes after the bulletin, which required banks and public companies to mark customers’ crypto holdings on their own balance sheets, drew ire from the industry and lawmakers alike.
Rescinding SAB 121
The SEC published Staff Accounting Bulletin No. 122 (SAB 122) on Thursday, effectively rescinding the interpretive guidance provided in SAB 121. Instead, the new bulletin directs firms to rely on existing accounting standards from the Financial Accounting Standards Board (FASB) or International Accounting Standards (IAS) when dealing with crypto assets held on behalf of clients.
“The staff reminds entities that they should continue to consider existing requirements to provide disclosures that allow investors to understand an entity’s obligation to safeguard crypto-assets held for others,” the SEC notice stated.
Controversial Guidance
SAB 121, which was issued in 2022 under former SEC Chair Gary Gensler, had mandated that crypto assets held by banks and public companies for their customers be recorded on the firms’ own balance sheets. Gensler had argued that this requirement would protect investors in the event of bankruptcies, citing instances where bankruptcy courts ruled that crypto assets were not “bankruptcy remote.”
However, the crypto industry and many lawmakers strongly opposed SAB 121, viewing it as an overreach by the SEC. The guidance was even the subject of a Congressional Review Act resolution that passed both the House and Senate, although it was ultimately vetoed by then-President Joe Biden.
Peirce’s Opposition
SEC Commissioner Hester Peirce, a vocal critic of SAB 121 and now head of the agency’s new crypto task force, had long argued against the guidance. She contended that the SEC had not provided sufficient clarity on how securities laws apply to crypto and that an accounting bulletin may not have been the appropriate vehicle for such significant guidance.
“Bye, bye SAB 121! It’s not been fun,” Peirce tweeted on Thursday, announcing the withdrawal of the controversial bulletin.
– Hester Peirce, SEC Commissioner
Implications for the Industry
The rescission of SAB 121 and its replacement with SAB 122 is expected to provide some relief to banks, public companies, and crypto custodians who had grappled with the complex accounting requirements imposed by the previous guidance. By aligning with existing FASB and IAS standards, the new bulletin should offer greater clarity and consistency in the financial reporting of crypto assets.
However, it remains to be seen how this policy shift will impact the broader regulatory landscape for cryptocurrencies. As the SEC continues to navigate the rapidly evolving world of digital assets, market participants will be closely watching for further guidance and rule-making from the agency.
The Road Ahead
The withdrawal of SAB 121 marks a significant victory for the crypto industry and its advocates, who have long called for more nuanced and appropriate regulatory approaches to digital assets. As the SEC’s newly formed crypto task force, led by Commissioner Peirce, begins its work, there is hope that future guidance will strike a better balance between investor protection and fostering innovation in the space.
Nevertheless, the path forward for crypto regulation remains complex and uncertain. As policymakers grapple with the unique challenges posed by this emerging asset class, it will be crucial for the industry to engage in constructive dialogue and collaboration with regulators to develop a framework that supports the responsible growth and adoption of cryptocurrencies.
Key Takeaways
- The SEC has withdrawn its controversial SAB 121 guidance on crypto accounting
- New SAB 122 directs firms to use existing FASB and IAS accounting standards
- Commissioner Hester Peirce, a critic of SAB 121, announced the withdrawal
- The move is seen as a victory for the crypto industry, but regulatory uncertainty persists
As the regulatory landscape for cryptocurrencies continues to evolve, it is clear that the SEC’s decision to rescind SAB 121 and issue new guidance in SAB 122 represents a significant shift in the agency’s approach to crypto accounting. While the long-term implications of this move remain to be seen, it is a positive development for an industry seeking greater clarity and consistency in the application of financial reporting standards to digital assets.
