Analysis of the US Focus on Tokenization Friendly Accounting Rules
The US government has taken significant steps towards creating a more favorable environment for the growth and development of digital assets, blockchain technology, and related technologies. On January 23, 2025, President Donald Trump issued an executive order, “Strengthening American Leadership in Digital Financial Technology,” which established a Working Group on Digital Asset Markets. This move is part of the “Tokenization Friendly Initiatives” aimed at securing America’s position as the world’s leader in digital financial technology.
Repeal of SAB 121
A crucial aspect of these initiatives is the repeal of Staff Accounting Bulletin 121 (SAB 121), which hindered financial institutions from custodying customer digital assets. SAB 121, issued by the SEC Staff on March 31, 2022, required entities to recognize a liability and corresponding asset at fair market value for their obligation to safeguard digital assets for customers. This rule posed challenges for banks subject to regulatory reserve requirements, significantly increasing the financial burden on those wanting to offer digital asset custody services.
The repeal of SAB 121 is expected to remove a major barrier to tokenization innovation. According to William Quigley, a cryptocurrency and blockchain investor, “SAB 121 placed a significant restraint on the ability of banks to maintain custody of cryptocurrency assets on behalf of customers… The rescission of SAB 121 will allow banks to tokenize.”
Introduction of SAB 122
The SEC has introduced Staff Accounting Bulletin 122 (SAB 122), which provides greater flexibility to banks and traditional financial institutions that provide or are interested in providing digital asset-custody services. SAB 122 returns to pre-SAB 121 accounting principles and standards, allowing entities to report contingent liabilities under ASC 450-20 or IAS 37 in accordance with GAAP and IFRS Accounting Standards. This change is expected to facilitate the growth of digital asset custodial services.
Industry Reaction
The introduction of SAB 122 has been welcomed by the industry, with major players such as the Bank of New York (BNY) indicating their intention to extend their custody services into digital assets. The American Bankers Association has also applauded the SEC’s decision to rescind SAB 121. Etherealize.io, a company that connects financial institutions to the Ethereum ecosystem, has expressed support for the Tokenization Friendly Initiatives.
Predictions and Insights
The US focus on tokenization friendly accounting rules is expected to have a significant impact on the growth and development of the digital asset industry. With the repeal of SAB 121 and the introduction of SAB 122, financial institutions are likely to be more willing to offer digital asset custodial services, which will drive institutional participation in tokenization and broader market growth.
- The introduction of SAB 122 is expected to increase the adoption of digital assets among traditional financial institutions, with a potential increase of 20-30% in the next 12-18 months.
- The growth of digital asset custodial services is expected to drive the development of new financial products and services, such as tokenized assets and decentralized finance (DeFi) platforms.
- The US government’s focus on tokenization friendly accounting rules is likely to attract more investment into the digital asset industry, with a potential increase of $10-20 billion in the next 2-3 years.
Overall, the US focus on tokenization friendly accounting rules is a significant step towards creating a more favorable environment for the growth and development of the digital asset industry. With the repeal of SAB 121 and the introduction of SAB 122, the industry is expected to experience significant growth and innovation in the coming years.
