New Measures Related to Crypto Assets

New regulatory advancements and executive actions have recently gone into effect, reflecting a significant shift in posture towards digital and crypto assets, including blockchain and related technologies. Staff Accounting Bulletin No. 122 (SAB 122), issued by the U.S. Securities and Exchange Commission (SEC), rescinds the previous guidance of SAB 121. This new SAB was issued on the heels of a recent executive order that revokes the previous administration’s Order 14067, which grants additional protections and support to digital currency markets.

SAB 122

The recently released Staff Accounting Bulletin No. 122 (SAB 122) from the SEC, effective as of January 30, 2025, replaces the existing interpretive guidance under the previous SAB 121 interpretations of Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for its Platform Users.

Previously, an entity that operates a platform that allows users to transact in crypto assets, or otherwise has an obligation to safeguard its customers’ crypto assets, would present a liability and a related asset measured at fair value of the user’s digital assets. Moving forward, the guidance in SAB 122 reverses the requirement to record a gross asset and liability, and rather requires the recognition of a liability related specifically to the risk of loss associated with the counterparties by applying ASC 450 – Contingencies, Loss Recoveries, and Guarantees.

The bulletin applies to entities on a fully retrospective basis for periods beginning after December 15, 2024. Early adoption of this guidance can be applied in earlier interim or annual periods after the effective date. Once implemented, entities are required to adjust the prior period financial statements by:

• Eliminating previously recognized safeguarded assets and liabilities: Under SAB 122, safeguarding assets and liabilities may not need to be recorded. Instead, contingency guidance should be applied to assess whether potential losses are probable and can be reasonably estimated.
• Recognize opening adjustments to retained earnings: Entities that have previously recognized losses on safeguarding assets under SAB 121 will reverse those losses as an opening adjustment or to the extent differences exist in the carrying amounts of safeguarding assets and liabilities as of the beginning of the earliest reporting period.

The original intentions of SAB 121 were to address risks and uncertainties centered around the increasing number of platforms in the digital asset exchange market. These entities’ ability to transact with crypto assets and have the systems in place with the obligation to safeguard their customers’/users’ assets dictated the direction of the prior interpretive guidance. This led to additional disclosure requirements in the notes to the financial statements, detailing the nature of the business, amounts held in custody on behalf of customers and separate disclosures for when significant digital assets met material thresholds along with vulnerabilities as a result of concentrations in certain digital assets.

The consistent considerations in SAB 122 mention retaining applicable disclosures necessary to allow stakeholders to understand an entity’s obligation to safeguard digital assets held for others. Under existing SEC rules, certain disclosures under ASC 450-20 and ASC 275, Risks and Uncertainties include the description of the business, risk factors or management’s discussion and analysis of financial condition and results of operations.

Issuance of SAB 122 represents a significant change for entities involved in safeguarding digital assets. Given the complexity of determining whether transactions were within the scope of SAB 121, we anticipate that most impacted entities will elect to early adopt SAB 122 and remove the custodial asset and related liability. For those entities whose primary operations are keyed to the use of digital assets (e.g., digital asset miners and blockchain protocols), existing guidance under ASC 350-60 is unaffected by the recent custody announcements.

New Executive Order

In addition, the current administration has recently announced an executive order revoking previous Executive Order 14067. This new order directly affects the digital asset industry by:

• Prohibiting the establishment, issue or promotion of a U.S central bank digital currency (CBDC)
• Promoting dollar-backed stablecoins and fair and open access to banking services
• Protecting the lawful use of decentralized blockchain networks
• Providing regulatory clarity for digital assets and private-sector entities
• Establishment of the Working Group on Digital Asset Markets
• Evaluation on the potential creation and maintenance of ‘National Digital Stockpile’

As volatility encircles global markets and stakeholders prepare for upcoming regulatory shifts, those professionals actively preparing for the change in methodology to their business should contact Weaver to assist in these determinations. We’re here to help provide clarity and eliminate the guesswork in a constantly shifting environment.

Authored by Taylor Cave

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