9.2 Background on SAB 121
The SEC staff issued SAB 121 on March 31, 2022, in response to an increase in the
number of entities that safeguard crypto assets, since there are unique
technological, legal, and regulatory risks associated with safeguarding such assets.
Before SAB 121, an entity generally did not record safeguarded crypto assets of its
users on its balance sheet (with a corresponding liability to return those assets)
unless the entity had control of those assets. SAB 121 resulted in a significant
change to the accounting and financial reporting for these entities, since it
required the fair value of the crypto assets being safeguarded to be recorded as a
liability, with a corresponding asset, when an entity does not control the crypto
assets. The corresponding safeguarding asset, recorded at the fair value of the
crypto assets held, was required to factor in potential loss events (e.g., theft,
loss of the private key, loss of the crypto asset, cybersecurity hacks) that could
affect the asset’s measurement. The occurrence of such a loss event would result in
a difference between the safeguarding asset and the safeguarding liability.
In addition to the requirement related to balance sheet recognition, SAB 121 required
entities to disclose detailed information about the nature and amount of crypto
assets being safeguarded, as well as any vulnerabilities related to concentrations
in crypto asset safeguarding. Such disclosures included information about who holds
the cryptographic keys, who maintains internal recordkeeping, and who is obligated
to secure the assets and protect them from loss or theft.
SAB 121 did not define safeguarding, and entities were often required to use
significant judgment in determining whether a transaction was within the scope of
SAB 121. In addition, on-balance-sheet recognition posed challenges for certain
regulated entities subject to regulatory requirements based on balance sheet metrics
(e.g., capital or reserve requirements).
For more information about the accounting for safeguarding obligations in accordance
with SAB 121, see Appendix C.