SAB 122 Just Changed Everything for Crypto—But There’s a Catch
For two years, traditional banks were handcuffed by an SEC rule that forced them to treat customer crypto as a liability on their own balance sheets. SAB 121 made crypto-custody a nightmare. Now? It’s gone.
Banks are celebrating. Exchanges are relieved. Stablecoin issuers are considering new opportunities.
But before the industry gets too excited…
This win isn’t without it’s downsides.
This isn’t the end of crypto regulation.
And if the industry doesn’t act fast, we could be heading for an even bigger problem than SAB121 created.
By the end of this blog, you’ll see why SAB 122 changes everything, what new risks it introduces, and why Proof of Reserves may have just became the single most important transparency tool in crypto.
SAB 121: The Rule That Blocked Banks from Crypto Custody
Let’s rewind. In April 2022, the SEC dropped SAB 121, blindsiding the industry. With zero public comment period, this rule forced publicly traded companies—including banks, exchanges, and custodians—to present customer crypto assets as liabilities on their balance sheets.
Why did this matter?
Unlike crypto custodians like BitGo or Coinbase Custody, banks have strict capital requirements under Basel III and U.S. banking regulations. When SAB 121 classified customer crypto as liabilities, banks had to hold an equal amount of Tier 1 capital against those assets—effectively making crypto custody financially impossible for them.
Example: If a bank held $1 billion in Bitcoin for customers, it needed $1.25 billion in capital reserves to cover it.
Traditional crypto custodians didn’t face this same financial burnden, meaning the rule effectively blocked banks from entering crypto custody while leaving the door open for non-bank custodians.
The Repeal: What SAB 122 Changes
With SAB 122, issued in December 2024, the SEC completely repealed the customer asset reporting requirement. The change applies immediately, meaning publicly traded banks, exchanges, and stablecoin issuers no longer have to list customer crypto as liabilities on their balance sheets.
Who Benefits from This?
Banks – No longer forced to hold massive capital reserves, they can now legally and financially offer crypto custody. This opens the door for major financial institutions to enter the space.
Crypto Exchanges & Custodians – Publicly traded exchanges like Coinbase no longer need to report massive customer assets (and associated liabilities), simplifying their financial statements.
Stablecoin Issuers – Less reporting requirements for customer assets and liabilities means faster adoption of fiat-backed stablecoins at a reduced compliance cost.
But there’s one problem.
The Transparency Gap No One’s Talking About
While this repeal is a win for adoption, it removes key transparency measures from public companies and banks, specifically over customer assets held by these companies.
Under SAB 121, companies had to report customer crypto holdings on their own balance sheets, meaning there was at least some level of disclosure. Now, with SAB 122, customer assets (and the associated liabilities to return those customer assets) are completely off the books—meaning:
Less visibility into the customer crypto assets that an exchange actually holds on behalf of it’s customers.
Less stringent audit requirements for customer assets
More risk for customers and investors
To be clear, crypto customers will have zero visibility into whether exchanges and custodians actually hold the crypto they claim to. While companies and auditors will have to assess if a contingent liability related to customer assets exists, the customer holding amounts are completely opaque under SAB122.
That’s a problem.
And if you don’t think this matters, ask the millions of FTX customers who thought their assets were safe—until they vanished overnight.
So, the question isn’t “Is SAB 122 good for adoption?”—it is.
The question is: How do we replace the transparency that was just lost?
Proof of Reserves: The Way Forward
The answer isn’t testing of internal controls or a SOC report, customer funds can still be stolen or lost even with a top notch control environment — it’s Proof of Reserves (PoR).
What is Proof of Reserves?
PoR is an independent attestation that cryptocurrency exchanges, custodians, stablecoin issuers and more have sufficient assets to cover all customer liabilities. Unlike traditional audits, Proof of Reserves:
Directly covers customer assets and liabilities in like-kind (e.g., Bitcoin reserves vs. Bitcoin customer balances)
Uses cryptographic tools like Merkle Trees to allow customers to verify their holdings, while preserving customer privacy
Can be conducted in real time or on a frequent basis (quarterly, monthly, or even daily)
And here’s the kicker: Proof of Reserves has benefits over traditional audits:
Traditional audits? Complete once a year. PoR can be done quarterly, monthly, or even on a real-time.
Financial statements? Private company financials are hidden from the public. PoR? Publicly available for all companies.
Audit Procedures? Customer assets are tested on a sample basis, if at all. PoR? 100% of customer balances tested, covering the area that customers are most concern about.
This isn’t speculation. The best exchanges in the world are already performing Proof of Reserves. And if you’re a custodian, exchange, or stablecoin issuer, PoR might be differentiation you need from your competitors, especially with rescission of SAB121.
The Bottom Line: What’s Next?
SAB 122 is a massive win for crypto adoption.
Banks are finally free to offer custody services.
Institutional adoption is likely to grow significantly.
But here’s the uncomfortable truth:
Without transparency, another FTX-level disaster is dramatically more likely to occur.
And if that happens, the SEC will come back swinging—with rules even worse than SAB 121.
So if you’re running an exchange, a custody platform, or a stablecoin business, we recommend:
Building a Proof of Reserves Program
Giving your customers the transparency they need.
Build trust before regulators force your hand.
Want to Stay Ahead?
Work with the team that’s helped top crypto companies demonstate control of customer assets.
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Contact The Network Firm, the largest crypto-only CPA firm in the U.S., for expert assistance with audit, accounting, and advisory needs. Our team of professionals has extensive experience leading clients through successful engagements for varous types of crypto companies, including stablecoins, exchanges, custodians, miners, and more.
Jeremy Nau, CPA
Author Bio:
Jeremy is a founding member and audit partner at The Network Firm and co-creator of LedgerLens, a suite of digital asset-focused audit and attestation tools. Jeremy holds credentials as a Certified Public Accountant (CPA), Certified Management Accountant (CMA - inactive), and Certified Bitcoin Professional (CBP).
Over his 10-year career, including 7 years focused on digital assets, Jeremy has led audit and attest engagements across various industry niches, including exchanges, custodians, miners, token projects, wallets, payment processors, and stablecoins. Jeremy specializes in “Proof of Reserve” engagements.
Jeremy’s goal is to shape the future of the accounting profession, strengthened by verifiable, transparent, and trusted blockchain ledgers.
Connect with Jeremy Nau on LinkedIn/Twitter for more expert advice.