Nonetheless, a note of caution is in order. Recission of SAB 121 does not completely absolve a reporting company from recognizing a liability relating to crypto custody activities.
As we discussed in our Alert last summer, Staff Accounting Bulletin 121 of the U.S. Securities and Exchange Commission (SEC) placed a significant restraint on the ability of banks to maintain custody of cryptocurrency assets on behalf of customers by requiring a reporting company bank to reflect both an asset and a liability, for which it must reserve capital on its balance sheet even though it is not the owner of the crypto. By large margins, the House and the Senate took action last year to pass H.J. Res 109 disapproving of SAB 121, but then-President Joseph Biden vetoed the resolution, and it was not taken up by Congress again.
With President Donald Trump sworn into office last week and Gary Gensler no longer the chair of the SEC, the attitude of the SEC on the point has apparently shifted. In Staff Accounting Bulletin 122 issued on January 23, 2025, the SEC rescinded SAB 121 and removed reference to it in the SEC’s Staff Accounting Bulletin Series. Such recission applies to annual periods beginning after December 15, 2024, and may be applied retroactively for prior periods that are reported after the effective date of SAB 122. The move was quickly applauded by the American Bankers Association and praised by others as a positive development for growth and innovation.
Nonetheless, a note of caution is in order. Recission of SAB 121 does not completely absolve a reporting company from recognizing a liability relating to crypto custody activities. As described in SAB 122, applicable accounting principles and standards may continue to affect whether a reporting company should report a contingent liability on its balance sheet and the method for measuring the amount of such liability. Still, it is unlikely that such requirements would require the one-to-one asset to liability ratio that SAB 121 imposed.
A more significant hurdle potentially arises from the federal regulators that directly supervise banks. Another of our banking Alerts last summer took a deep dive into the shifting guidance that the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) have given regarding banks engaging in cryptocurrency activities. Preliminary guidance around 2020 seemed cautious but positive. Later guidance was less clear. Although the agencies stated generally in a joint statement that banks “are neither prohibited nor discouraged from providing banking services to customers of any specific class or type,” they expressed their view that cryptocurrency activities are “highly likely to be inconsistent with safe and sound banking practices.”
In particular, the FDIC sent private, direct supervisory letters to numerous financial institutions requesting that they “pause, or not expand, planned or ongoing crypto-related activities.” In an evaluation report in October 2023, the FDIC Office of Inspector General criticized the pause process and recommended that certain steps be taken by the FDIC to provide clear guidance. This apparently did not happen.
The pause not only affects banks that want to engage in cryptocurrency activities, but digital asset companies that want banking services as well. On June 27, 2024, History Associates Incorporated brought suit in federal court on behalf of Coinbase Inc. to compel the FDIC to provide copies of the pause letters under the Freedom of Information Act. In December 2024, and again on January 3, 2025, the FDIC published redacted copies of some, but not all, of the pause letters. It also provided a redacted 2022 internal memorandum describing the procedures to be followed by its regional offices and detailed questions to pose to banks as part of the supervisory process. Coinbase is trying to make the case that the FDIC has been actively engaged in debanking companies in the crypto space.
With the SEC no longer enforcing SAB 121, scrutiny will continue to turn to bank regulators. To a certain extent, SAB 121 allowed bank regulators to take a wait-and-see approach with regard to cryptocurrency activities. Now that SAB 121 no longer restricts crypto banking activities, pressure will likely mount on the FDIC, the FRB and the OCC to follow through on their prior guidance with clearer, more concrete standards that neither prohibit nor discourage all crypto banking activities but allow banks to develop appropriate activities in a way that is consistent with safe and sound banking practices.
Acting FDIC Chairman Travis Hill addressed such concerns in his statement on January 20, 2025, noting that he expects the FDIC, among other things, to adopt “a more transparent approach to fintech partnerships and to digital assets and tokenization,” and to “[w]ork to ensure law-abiding customers have, and do not lose, access to bank accounts and banking services.” The FRB also published an Economic Policy Review in November 2024 providing further insight into its assessment of the potential financial stability risks to be addressed, noting that so far such risks have been limited. For its part, the OCC has been regulating at least one crypto company since 2021, gaining valuable experience in the process. These statements and actions provide a potential framework for the regulators to develop actionable guidance.
For More Information
If you have any questions about this Alert, please contact Roger S. Chari, Joseph E. Silvia, any of the attorneys in our Banking and Finance Industry Group, any of the attorneys in our Financial Technology Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.