Impact of SAB 121 adoption on crypto asset entities

Sean C. PrinceNicholas G. Topoll
| 8/23/2022
Impact of SAB 121 adoption on crypto asset entities

Get a first look at the impact of SEC staff guidance on entities safeguarding crypto assets.


On March 31, 2022, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 121 (SAB 121), which is effective for current reporting entity financial statements covering the first interim or annual reporting period ending after June 15, 2022. A reporting entity within the scope of SAB 121 must record a liability for its obligation to safeguard crypto assets (safeguarding liability), which is both initially and subsequently measured at the fair value of the safeguarded crypto assets. The entity also would record a corresponding asset (safeguarding asset), measured on the same basis as the safeguarding liability.

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SAB 121 also requires entities to disclose information about the adoption of SAB 121, the entity’s accounting policy for safeguarding obligations, and other information about the facts, circumstances, and risks arising from the safeguarding arrangement. (See exhibit for specific disclosure requirements.)

Exhibit: SAB 121 disclosure requirements


SEC staff views

Financial statement disclosure

An entity must disclose the following information in the notes to its financial statements:

  • The nature and amount of each crypto asset the entity safeguards on behalf of others, with separate disclosure for each significant crypto asset.
  • Vulnerabilities the entity has due to any concentrations in safeguarding activities (see ASC 275-10-50, IAS 1).
  • Fair value measurement disclosures for the safeguarding asset and safeguarding liability (see ASC 820-10-50, IFRS 13).
  • The accounting policy used to account for the safeguarding liabilities and corresponding assets (see ASC 235-10-50, IAS 1).
  • The effects of the initial application of SAB 121 (see ASC 250-10-50).

In connection with these disclosures, an entity should consider disclosing a description of who (for example, the entity, its agent, or another third party) holds the private key information, who maintains the internal recordkeeping, and who is obligated to secure the crypto assets and protect them from loss or theft.

Disclosure outside the financial statements

Disclosures an entity might need to provide outside the financial statements include the following:

  • Qualitative information regarding significant risks and uncertainties should be included within the description of the business, risk factors, or management’s discussion and analysis of financial condition and results of operation.
  • When material, a description of the types of loss or additional obligations that could occur and the potential impact that the destruction, loss, theft, compromise, or unavailability of the private key information would have to the entity’s ongoing business, financial condition, operating results, and cash flows. In addition, if material, any risk mitigation steps in place should be described (for example, insurance coverage directly related to the crypto assets held for others).
  • A discussion of the legal ownership of the crypto assets, including whether they would be available to satisfy general creditor claims in the event of bankruptcy.

Source: Crowe analysis

Initial observations from adopters

Public entities have filed their first Form 10-Q filings reflecting the adoption of SAB 121. Initial observations on the impact of SAB 121 on affected entities’ financial statements and disclosures follow.

Which entities had a material impact from the adoption of SAB 121?

The most common types of entities with a material SAB 121 adoption impact operate a trading platform and provide wallet services to customers, activities giving rise to the risks enumerated in SAB 121. Other entities with a material SAB 121 impact provide customers with digital asset payment and trading services (for example, payment platform entities) or accept crypto assets as collateral (for example, financial institutions).

The nature and level of involvement of entities affected by SAB 121 range from explicit custodial relationships where the entity directly holds the customers’ private keys to arrangements where the entity uses a third-party custodian but has sufficient involvement (for example, due to the structure of the custodial relationship, recordkeeping responsibilities, and so on) to be deemed to have a safeguarding obligation. We also observed from the disclosures that safeguarded assets commonly are placed in an omnibus account (usually a cold wallet) that is segregated from the entity’s assets but not from other customers’ assets.

Crowe observation: For more information about the scope of SAB 121 and the types of factors an entity should consider in determining whether it falls within the scope of SAB 121, refer to the Crowe publication “SAB 121 Frequently Asked Questions.”

How did SAB 121 affect the financial statements?

The most common impact from adoption of SAB 121 was a gross up of affected entities’ balance sheets – stemming from the initial recognition of a safeguarding liability and the corresponding safeguarding asset. We did not observe any entities recording an impact to the income statement or the statement of cash flows.

Crowe observation: Under SAB 121, an impact to the income statement or statement of cash flows would not be expected unless a loss event (for example, the loss of safeguarded crypto assets) were to occur.

What did entities disclose about the application of SAB 121 in their notes to the financial statements?

Many entities disclosed that they had adopted SAB 121 but that it had no material impact on their financial statements; similarly, many entities disclosed that SAB 121 was not applicable.

For entities with a material impact, there was diversity in the nature and extent of footnote disclosure. Some entities with more significant safeguarding liabilities added a separate note discussing the conditions that led to the safeguarding liability and provided tabular presentation of the amount and types of digital assets safeguarded. Other entities included the SAB 121 disclosures in existing notes and used a simple narrative to describe the types and amount of digital assets safeguarded. As another example, some entities disclosed the initial impact of the application of SAB 121 as of the beginning of the current reporting period, while other entities merely disclosed the impact as of the end of the current reporting period.

Most entities disclosed that the fair value measurement of safeguarding liabilities and safeguarding assets was considered a Level 2 measurement under Topic 820, “Fair Value Measurements.” However, a small number of entities reflected the fair value measurement as Level 1.

What else did we observe from entities’ SAB 121 disclosures?

  • Most SAB 121 safeguarding liabilities related to more common crypto assets, such as bitcoin and ether. However, some entities disclosed safeguarding liabilities related to other forms of digital assets, including non-fungible tokens (NFTs).
  • Some entities disclosed that they did not expect the safeguarding liability to result in future cash outflows.
  • Several entities disclosed risk mitigation strategies, including insurance coverage and whether the coverage is sufficient to protect against loss due to theft or fraud.
  • Many entities’ SAB 121 disclosures addressed the lack of legal precedent in regard to ownership of crypto assets and whether or not those assets would be available to satisfy general creditor claims in the event of bankruptcy. Some entities stated they believe the digital assets held in custody should be respected as users’ property in the event of bankruptcy.

Next steps

The digital asset industry continues to evolve, including the types of arrangements that could give rise to a safeguarding liability under SAB 121. Entities should continue to monitor their involvement with digital assets to evaluate whether SAB 121 is applicable.

To learn more about SAB 121, refer to additional Crowe publications:

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Sean Prince
Sean C. Prince
Nic Topoll
Nicholas G. Topoll