Executive Briefing
Staff Accounting Bulletin 121, issued by the SEC in March 2022, imposed an accounting requirement that effectively excluded major US banks from the digital asset custody business for nearly three years. SAB 121 required entities that custody crypto assets on behalf of clients to record those assets — and corresponding liabilities — on their own balance sheets. For banks subject to capital adequacy requirements, this created an insurmountable economic obstacle. The SAB’s reversal in January 2025 removed this barrier, opening the door for BNY Mellon, State Street, JPMorgan, and Citigroup to compete directly with Coinbase Prime, Anchorage, and BitGo in institutional digital asset custody. The competitive dynamics of a $5-10 trillion potential custody market are being reset.
What SAB 121 Required
Staff Accounting Bulletin 121, issued March 31, 2022, directed entities that safeguard crypto assets on behalf of customers to recognize: (1) a liability on the entity’s balance sheet to reflect the obligation to safeguard the customers’ crypto assets, and (2) a corresponding asset equal to that liability, representing the crypto assets being safeguarded.
This sounds straightforward — until you understand how banks are regulated. For SEC registrants that are also bank holding companies subject to prudential capital requirements, this balance sheet treatment had catastrophic economics.
Capital adequacy requirements apply to assets on the balance sheet. Under Basel III capital rules (implemented in the US through Federal Reserve and OCC regulations), risk-weighted assets on a bank’s balance sheet require the bank to hold equity capital against them. The required capital ratio for standard assets is 8% (Tier 1 + Tier 2) under Basel III, but regulators apply higher risk weights to crypto assets — some proposed risk weights for crypto reach 1,250%, meaning banks would need to hold capital equal to 100% of the crypto asset value.
Client custody assets are normally off balance sheet. When BNY Mellon custodies $2 trillion in traditional securities for pension funds and mutual funds, those securities are not on BNY Mellon’s balance sheet. They are client assets — BNY Mellon holds legal title as custodian but does not recognize them as its own assets or liabilities. This off-balance-sheet treatment is the foundational accounting principle that makes custody banking economically viable. Custody banks would be impossibly undercapitalized if they had to hold regulatory capital against every security they safeguard for clients.
SAB 121 applied the opposite treatment to crypto custody. A bank custodying $1 billion in Bitcoin for institutional clients would need to record $1 billion of assets and liabilities on its own balance sheet — and potentially hold hundreds of millions in capital against those assets. The economics made bank crypto custody unprofitable before a single custody fee was collected.
Why SAB 121 Was Controversial
The banking industry, its regulators, and Congressional oversight committees objected to SAB 121 on three grounds.
Inconsistency with traditional custody accounting. Bank regulators and the banking industry argued that SAB 121 contradicted the foundational principle that custody assets are off-balance-sheet. There was no analogous accounting requirement for banks custodying traditional securities, bearer bonds, or physical assets. The SEC was applying unique accounting treatment to crypto custody without clear justification for the departure from established principles.
Regulatory overreach without rulemaking. Staff Accounting Bulletins are SEC staff guidance documents — they are not formal rules, they do not go through notice-and-comment rulemaking, and they are technically not legally binding. SEC staff characterized SAB 121 as clarifying existing GAAP requirements. Critics (including five Republican members of the SEC’s own advisory committee) argued the SAB constituted de facto rulemaking without the procedural safeguards that rulemaking requires.
Market structure distortion. By making bank crypto custody economically nonviable, SAB 121 effectively protected crypto-native custodians (Coinbase Prime, Anchorage, BitGo, Fireblocks) from bank competition. These entities are not subject to the same capital requirements as bank holding companies, so SAB 121 did not affect their economics. Congressional critics argued the SEC was engineering a market structure outcome — limiting bank participation in digital asset markets — through accounting guidance rather than explicit rulemaking.
Congressional override attempt. In May 2024, Congress passed a Congressional Review Act resolution to rescind SAB 121 with bipartisan support (both chambers). President Biden vetoed the resolution — the only successful veto of his term on a crypto-related matter — preserving SAB 121 through the end of his administration.
The January 2025 Reversal
The SEC under acting Chair Mark Uyeda rescinded SAB 121 in January 2025, issuing Staff Accounting Bulletin 122 in its place. SAB 122 removed the mandatory balance sheet treatment requirement and returned to the general principle that custody obligations are disclosed in financial statement footnotes rather than recognized as on-balance-sheet assets and liabilities — consistent with how traditional securities custody is accounted for.
The reversal was not surprising given the incoming administration’s pro-crypto policy orientation. What was notable was the speed: SAB 122 was among the first significant SEC actions of the new administration, signaling that digital asset regulatory reform was a priority.
SAB 122 does not completely remove all disclosure obligations for crypto custodians. Entities that custody digital assets for clients still need to disclose the nature and extent of those custodial arrangements in their financial statements, describe their risk management practices, and address any material contingent liabilities arising from custody activities (including smart contract risk, private key management risk, and legal uncertainty about digital asset property rights). The difference is between disclosure (informing investors) and recognition (booking assets and liabilities on the balance sheet with capital consequences).
Practical Implications for Bank Custodians
BNY Mellon, State Street, JPMorgan, Citigroup, and Northern Trust are the five US global systemically important banks most directly positioned to enter institutional digital asset custody.
BNY Mellon is the furthest advanced. The bank received a conditional exemption from New York’s SAB 121 implementation guidance in 2023 (NYDFS cooperated with BNY Mellon on a pilot) and has been actively building its digital asset custody infrastructure. BNY Mellon already serves as custodian for BlackRock’s BUIDL and Franklin Templeton’s FOBXX. Expanding from fund custody to direct digital asset custody for institutional investors is the next step.
State Street has invested in institutional blockchain infrastructure through its State Street Digital division. Post-SAB 121 reversal, State Street is positioned to offer digital asset custody alongside its existing $44 trillion in custodied traditional assets — a cross-selling opportunity with existing institutional clients that crypto-native custodians cannot match.
JPMorgan operates through multiple digital asset channels (Kinexys for payments, Onyx for repo, and now direct custody capabilities). JPMorgan’s institutional client base — pension funds, sovereign wealth funds, insurance companies — is precisely the target market for bank digital asset custody, and these clients have existing risk and compliance frameworks that strongly prefer bank custodians over crypto-native alternatives.
The competitive advantage of bank custodians is not technology — it is regulatory standing, institutional trust, and balance sheet strength. Pension funds and insurance companies subject to fiduciary obligations often face internal governance requirements to use bank custodians with federal deposit insurance (for cash assets) and established regulatory oversight. Crypto-native custodians have spent years arguing that their technology and security practices are superior; bank entry forces a different competitive frame centered on regulatory credibility and institutional relationships.
Competitive Dynamics: Banks vs Crypto-Native Custodians
The post-SAB 121 custody market will not be winner-take-all. The institutional digital asset custody market will segment by client type, asset type, and service requirements.
Where banks will win: Traditional institutional investors (pension funds, endowments, insurance companies, sovereign wealth funds) that already custody traditional assets at banks and prefer to consolidate custodial relationships. These clients value consolidated reporting, existing credit relationships, and regulatory familiarity over technological innovation.
Where crypto-native custodians will win: DeFi-native protocols, crypto fund managers, and technology-forward clients that require specialized services — direct blockchain settlement, DeFi staking, token governance participation, and deep integration with on-chain financial infrastructure. Banks will be slow to offer these services safely; Coinbase Prime, Anchorage, and Fireblocks already do.
Contested ground: Mid-size institutional investors — family offices, hedge funds, corporate treasuries — that are adding digital assets as an allocation alongside traditional portfolios. These clients want the technology capabilities of crypto-native custodians with the regulatory standing of bank custodians. They may drive demand for joint venture arrangements or white-label bank custody of crypto-native infrastructure.