On March 31, 2022, the staff of the Division of Corporation Finance and the Office of the Chief Accountant of the SEC issued Staff Accounting Bulletin (SAB) No. 121 (SAB 121), which “adds interpretive guidance for entities to consider when they have obligations to safeguard crypto-assets held for their platform users.” SAB 121 highlights the enhanced technological, legal and regulatory risks associated with safeguarding digital assets, as compared with more traditional asset classes. Specifically, SAB 121 asserts that a company is subject to “significant increased risks… including an increased risk of financial loss” when that company controls the cryptographic keys associated with a user’s digital assets. As a result, the staff believes that reporting companies should quantify and disclose that obligation, and record a liability and corresponding asset on their balance sheets at fair value.

Notably, Commissioner Hester M. Peirce, affectionally known by crypto-enthusiasts as “Crypto Mom,” issued a simultaneous statement in opposition of SAB 121. In her statement, Commissioner Peirce notes that SAB 121 only adds to the SEC’s “scattershot and inefficient approach to crypto” and that the staff did not even have the courtesy of acknowledging its responsibility for creating the legal and regulatory risks that it is seeking to address. Not necessarily disagreeing with its substance, Commissioner Peirce criticizes the method and timing of SAB 121. As a notoriously pro-crypto Commissioner, she highlights the apparent randomness of the timing given how long the underlying circumstances giving rise to SAB 121 have been in the market. She also questions why the staff used a staff accounting bulletin and not a more robust rulemaking process that allowed for public participation.

Companies subject to SAB 121 should review the full text of the guidance and consult with their accountants as they prepare their upcoming financials statements. A high-level overview of the guidance follows.

SAB 121 communicates the staff’s expectation that the disclosure of the safeguarding obligations include the following:

• since loss exposure is based on the significant risks associated with safeguarding the crypto-assets held for its platform users, companies should measure this safeguarding liability at initial recognition and each reporting date at the fair value of the crypto-assets that the company is responsible for holding;

• such company should also recognize an asset at the same time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of the crypto-assets held for its platform users;

• the notes to the financial statements should include clear disclosure of the nature and amount of crypto-assets that a company is responsible for holding for its platform users, with separate disclosure for each significant crypto-asset, and the vulnerabilities such company has due to any concentration in such activities;

• such disclosure should include information regarding the fair value measurements of the safeguarding obligations; and

• the accounting for the liabilities and corresponding assets should be described in the footnotes to the financial statements.

In addition, SAB 121 reminds reporting companies that disclosures regarding the material risks and uncertainties associated with holding digital assets may be required outside of the financial statements in the description of business, risk factors, or management’s discussion and analysis of financial condition and results of operation.

Reporting companies should implement SAB 121 no later than the financial statements covering the first interim or annual period ending after June 15, 2022, with retrospective application as of the beginning of the fiscal year to which the interim or annual period relates. Companies registering their first class of securities with the SEC should implement SAB 121 beginning with their next submission or filing with the SEC with retrospective application, at a minimum, as of the beginning of the most recent annual period ending before June 15, 2022.