In January 2025 the SEC staff issued Staff Accounting Bulletin No. 122 (SAB 122), undoing one of the most consequential crypto accounting pronouncements of the prior cycle. SAB 122 rescinds the interpretive guidance in Topic 5.FF-the Codification home of SAB 121, which had required platforms safeguarding customer crypto to record a balance-sheet liability and offsetting asset at the fair value of those assets. With SAB 122, that grossed-up presentation comes off the balance sheet, and any liability is instead evaluated under the ordinary loss-contingency framework.

The bulletin is explicit about both what it removes and what replaces it. It states that it "rescinds the interpretive guidance included in Section FF of Topic 5 in the Staff Accounting Bulletin Series entitled Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for its Platform Users," with an effective date of January 30, 2025. In place of the automatic fair-value gross-up, the staff directs entities to a contingency analysis.

"...determine whether to recognize a liability related to the risk of loss under such an obligation, and if so, the measurement of such a liability, by applying the recognition and measurement requirements for liabilities arising from contingencies in Financial Accounting Standards Board Accounting Standards Codification (\"FASB ASC\") Subtopic 450-20, Loss Contingencies, or International Accounting Standard (\"IAS\") 37, Provisions."- SEC, Staff Accounting Bulletin No. 122, source

From a fair-value gross-up to a probability test

The shift is conceptual, not cosmetic. Under SAB 121, a custodian recognized a liability equal to the fair value of all customer crypto it held, regardless of whether any loss was probable-the obligation itself triggered the entry. Under SAB 122's pointer to ASC 450-20, a liability is recognized only when a loss is probable and reasonably estimable, the same standard that governs other loss contingencies such as litigation or warranty exposure. As one practitioner summary put it, entities now consider the risk of loss using their own data and risk assessments rather than booking the full value of client assets as a liability. The result is that, for most custodians, the large paired liability-and-asset lines disappear unless a specific, probable loss exists to accrue.

The transition is retrospective. SAB 122 says entities should effect the rescission of Topic 5.FF on a fully retrospective basis in annual periods beginning after December 15, 2024, and may elect to apply it in an earlier interim or annual period in filings made after the bulletin's effective date. A real filing illustrates the mechanics. In its Form 10-Q for the period ended June 30, 2025, PayPal Holdings stated that SAB 122 is effective for annual periods beginning after December 15, 2024 and is required to be applied on a fully retrospective basis, that it adopted the guidance as of March 31, 2025, and that it derecognized the crypto asset safeguarding liability and corresponding safeguarding asset on its balance sheet as of December 31, 2024.

Disclosure obligations did not go away

Removing the recognition entry did not remove the disclosure duty. SAB 122 reminds entities that they should continue to provide disclosures allowing investors to understand an entity's obligation to safeguard crypto-assets held for others, citing requirements that include, but are not limited to, Items 101, 105, and 303 of Regulation S-K; ASC Subtopic 450-20; and ASC Topic 275, Risks and Uncertainties. In other words, the obligation to explain custody risk in the business description, risk factors, and management's discussion and analysis persists even though the balance-sheet liability does not.

What changed for a custodian's balance sheet

The clearest way to see the effect is to picture a custodian before and after. Before SAB 122, a platform holding a large pool of customer crypto reported a safeguarding liability and an offsetting safeguarding asset, each equal to the fair value of that pool and each remeasured every period; the balance sheet was inflated on both sides by the value of assets the platform held for others rather than owned. After SAB 122, those two lines come off unless a specific loss is probable and estimable under ASC 450-20. The reported total assets and total liabilities of a custodian can therefore drop sharply on adoption-not because it holds less customer crypto, but because the accounting no longer grosses the holding onto the balance sheet. The PayPal disclosure captures precisely this: the liability and asset were derecognized as of December 31, 2024, the comparative date, on a fully retrospective basis.

The conceptual move to ASC 450-20 also changes the threshold for recognizing anything at all. Loss-contingency accounting recognizes a liability only when a loss is both probable and reasonably estimable; if a loss is reasonably possible but not probable, the entity discloses it rather than accruing it. Applied to crypto custody, that means a custodian books a liability only when a particular loss event-a theft, a breach, a specific claim-becomes probable and can be estimated, using its own data and risk assessment, instead of automatically carrying the full value of customer assets as a liability. The general loss-contingency framework that governs litigation reserves and warranty obligations now governs the custody risk-of-loss question as well.

Two points anchor a careful read of post-SAB-122 filings. First, because the change is retrospective, prior-period comparatives in 2025 filings were restated to remove the safeguarding lines, so year-over-year balance-sheet figures around custodied crypto reflect the accounting change, not a change in assets held. Second, SAB 122, like SAB 121 before it, is staff interpretive guidance rather than a Commission rule; what it does is reset how a safeguarding obligation is recognized and measured, moving it from an automatic fair-value gross-up to a probability-and-estimability test under existing contingency standards.