Throughout the 2024 election campaign, President Trump positioned himself as a champion of the digital asset industry who would eliminate onerous regulation and make it easier for companies in the space to do business. Just days after he returned to office, the Securities and Exchange Commission (SEC) under the second Trump administration took the first step toward deregulating digital assets.
On Jan. 23, the SEC published Staff Accounting Bulletin No. 122 (opens a new window), which “rescinds the interpretive guidance” included in SAB No. 121 (opens a new window), which was published in March 2022 under the Biden administration.
According to the SEC, SABs “reflect the Commission staff's views regarding accounting-related disclosure practices. They represent interpretations and policies followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws.” While SABs are not legally binding, the SEC staff considers them when reviewing companies’ public filings; ignoring their guidance could expose companies to regulatory or civil litigation.
In SAB No. 121, SEC staff directed banks and other companies taking custody of digital assets to treat those assets as liabilities on their balance sheets. The bulletin also required significant disclosures about digital assets in custody, such as the nature and amount of digital assets being safeguarded and information about who holds private keys.
SAB No. 121 created challenges for regulated companies subject to capital and reserve requirements, in addition to requiring judgment in determining if a transaction was within the bulletin’s scope. Because of this added cost and regulatory ambiguity, SAB No. 121 deterred many banks from offering digital asset custody or other services.
The repeal of SAB No. 121 opens the door for banks and other companies to custody digital assets and potentially makes it more attractive to provide other digital asset-related services, such as tokenization. We expect to see companies increasingly consider digital asset custody or relaunch projects they had put on hold since SAB No. 121’s introduction.
While this news is most relevant right now for banks and custodians, it represents a major shift in the accounting treatment of digital assets. This could lead to more digital asset adoption and service offerings by other financial institutions.
As they move forward with these initiatives, it’s vital that banks and other financial institutions carefully manage their risks. Key exposures they should consider include, but are not limited to:
Crime and custody risks. A bank's existing bond/crime insurance policy may not pick up exposures associated with new digital asset custody offerings. Some crime policies include outright exclusions for digital assets, while others may not include digital assets under the definition of money or property. If existing crime policies do not provide adequate coverage, financial institutions can work with experienced insurance brokers to modify them. Alternatively, and depending on how institutions hold customers’ digital assets, they could purchase dedicated cyber/crime coverage — offered by a select group of insurers — or specie/custody insurance for their digital assets under custody.
Professional liability. Offering new digital asset services or simply using blockchain technology may not be appropriately addressed by an institution’s existing errors and omissions (E&O) insurance coverage, due to exclusions or limited scope. Companies can consult with experienced insurance brokers to amend E&O policies to ensure new digital asset-related services are covered or secure separate E&O policies to cover them.
Board members’ personal exposure. Digital asset custody and other services may not have been underwritten to when directors and officers liability (D&O) insurance policies were originally placed. A company’s current D&O insurer could refuse to continue offering coverage or alter terms. Brokers with experience in the digital asset space can help companies partner with insurers eager to cover both traditional financial institution exposures and digital asset risks.
Lockton’s Emerging Asset Protection (LEAP) team will continue to monitor changes in the digital asset risk landscape, including the SEC’s new, more crypto-friendly approach, and continue to provide updates on what it means for your risk management and insurance programs. For more on this topic, contact a member of your Lockton team or email us at LEAP@lockton.com (opens a new window).
