C.1 Introduction

Under SAB 121, an entity that was responsible for safeguarding crypto assets held for its platform users recorded on its balance sheet (1) a liability (“safeguarding liability”) representing its obligation to safeguard such crypto assets and (2) a corresponding asset (“safeguarding asset”). This accounting represented a departure from the treatment of traditional custodial services for financial assets such as stocks and bonds or commodities such as gold before the issuance of SAB 121. In explaining why it believed the SAB was needed, the SEC staff noted that obligations associated with crypto asset custodial “arrangements involve unique risks and uncertainties” (e.g., technological, legal, regulatory) that are “not present in arrangements to safeguard [other] assets.”

While SAB 121 applied to entities that assume responsibility (legally, contractually, or both) for safeguarding crypto assets owned by another party, the SEC has viewed scope more broadly in formal and informal consultations since the SAB’s issuance. This broader view is based, in part, on the uncertain legal landscape (given the relative nascence of the digital asset sector) and the importance of information for users of the financial statements in the case of potential loss events. Accordingly, in the evaluation of whether the SAB applied to a given activity, it is critical to understand how an entity marketed its products and services; whether and, if so, how the entity was involved in transaction flow; whether the customer may have perceived that safeguarding responsibilities (direct or indirect) were assumed; and whether, in legal terms, the entity’s role and exposure might have been viewed as going beyond that of having a contractual relationship with the customer.