INSIGHT
The Securities and Exchange Commission (SEC) marked a significant change in crypto regulation on January 21, 2025 and January 23, 2025, with two major announcements: the formation of a dedicated crypto task force and the rescission of Staff Accounting Bulletin 121 (SAB 121). These changes signal a fundamental shift in the federal government’s approach to digital asset regulation.
A new direction for crypto regulation
The newly established crypto task force, led by SEC Commissioner Hester Peirce, will develop a comprehensive regulatory framework for digital assets. This initiative aims to provide clear guidelines for the crypto industry, addressing a longstanding need for regulatory clarity. The task force will coordinate with other federal agencies, including the Commodity Futures Trading Commission (CFTC), to ensure consistent oversight across markets.
The task force’s formation coincides with President Trump’s executive order “Strengthening American Leadership in Digital Financial Technology,” which establishes a supportive stance toward digital asset innovation while maintaining appropriate oversight. This executive order explicitly promotes several specific digital asset activities, including access to public blockchain networks and self-custody of crypto assets.
SAB 121 rescission brings relief to financial institutions
The SEC’s decision to rescind SAB 121 removes a significant barrier for banks and financial institutions offering crypto custody services. Under the previous guidance, companies holding crypto assets for clients needed to report these holdings as balance sheet liabilities, creating substantial financial constraints and effectively preventing many traditional institutions from entering the crypto custody space.
The new guidance, Staff Accounting Bulletin 122 (SAB 122), allows institutions to assess their crypto custody risks using recognition and measurement requirements for liabilities arising from contingencies set forth in existing Financial Accounting Standards Board (FASB) and International Accounting Standards (IAS) guidance. This change potentially opens the door for expanded crypto services from traditional financial institutions.
Impact on financial reporting
Under SAB 122, financial institutions can now:
- Apply existing FASB and IAS guidance
- Calculate liabilities based on actual risk assessments
- Report crypto holdings more consistently with other custodial assets
- Implement retrospective changes to financial statements
- Develop risk models specific to their custody operations
- The timing for implementation starts with annual periods beginning after December 15, 2024, though companies may elect to restate earlier financial statements to reflect the changes. This retroactive application option provides flexibility for institutions adapting to the new framework.
Market response and industry implications
The crypto industry has responded positively to these regulatory shifts, seeing them as steps toward more balanced oversight. The changes create opportunities for:
- Enhanced institutional participation in crypto markets
- Expanded custody services from traditional banks
- Financial reporting of crypto assets consistent with existing GAAP and IAS guidance
- Greater integration of digital assets into mainstream finance
- Development of new crypto-based financial products
- Increased competition in the custody services sector
Regulatory coordination and future developments
The SEC’s crypto task force will work closely with other regulatory bodies to ensure comprehensive oversight without duplicative or conflicting requirements. This coordination extends to:
- State regulatory agencies overseeing digital asset businesses
- Federal banking regulators developing custody guidelines
- International financial regulators addressing cross-border transactions
- Industry self-regulatory organizations establishing best practices
The task force is expected to address key areas including:
- Token classification standards
- Trading platform requirements
- Custody solution frameworks
- Investor protection measures
- Market manipulation prevention
- Risk disclosure standards
Looking ahead
As the crypto task force develops its framework and institutions adjust to SAB 122, the industry stands at a pivotal moment. These changes mark the beginning of a new chapter in crypto regulation, with potentially far-reaching implications for the financial sector. The combined impact of the new task force and SAB 121 rescission suggests a more nuanced approach to crypto regulation, balancing innovation with investor protection.
The next several months will be crucial as financial institutions begin implementing changes under SAB 122 and the task force begins its work on developing comprehensive guidelines. Market participants anticipate additional regulatory clarity as these initiatives progress, potentially leading to increased institutional adoption of digital asset services.
Navigating the transition with BPM
For organizations seeking guidance through these regulatory changes, BPM’s digital assets team provides comprehensive advisory services. With deep industry knowledge and regulatory insight, BPM helps clients implement new accounting treatments, assess custody risks and adapt to the evolving crypto landscape.
To learn more about optimizing your operations under the new regulatory framework, contact us.
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