From SAB 121 to SAB 122: How SEC Guidance and OCC Letters Cleared Wall Street Custody for US Crypto Assets

Regulatory status for this October 15, 2026 analysis: The SEC’s controversial Staff Accounting Bulletin No. 121 (SAB 121), which required entities safeguarding crypto-assets for platform users to recognize an on-balance-sheet liability and matching asset at fair value, was formally rescinded by the SEC’s Office of the Chief Accountant on January 23, 2025 through Staff Accounting Bulletin No. 122 (SAB 122). Combined with the Office of the Comptroller of the Currency (OCC) Interpretive Letter 1183, prudentially regulated US financial institutions have transitioned back to standard off-balance-sheet fiduciary custody accounting. This analysis outlines the legal mechanics, capital relief, institutional ETF diversification, and ongoing tax implications for market participants.

Executive summary: the dismantling of an artificial custody blockade

Between April 2022 and early 2025, the institutional adoption of digital assets in the United States faced an acute structural bottleneck: the world’s largest trust and custody banks were effectively prohibited from safeguarding Bitcoin and Ethereum on behalf of their institutional clients. This barrier was not established through formal legislation or notice-and-comment administrative rulemaking under the Administrative Procedure Act (APA); rather, it was erected through staff guidance in the form of SEC Staff Accounting Bulletin No. 121.

By treating customer-owned digital assets as balance sheet liabilities rather than standard off-balance-sheet custodial property, SAB 121 triggered punitive prudential capital reserve mandates under federal banking regulations. Global systemically important banks (G-SIBs) such as BNY Mellon, State Street, Citigroup, and Northern Trust faced regulatory capital charges that transformed an otherwise low-risk fee-generating custody business into an unsustainable capital drain.

The formal rescission of SAB 121 through Staff Accounting Bulletin No. 122 (SAB 122) in January 2025, paired with the OCC’s confirmatory supervisory framework, permanently reshuffled the competitive landscape of American crypto custody. As of late 2026, the market is undergoing a structural de-concentration: institutional spot exchange-traded funds (ETFs) and registered investment advisers (RIAs) are systematically diversifying custody operations across both native crypto custodians and multi-trillion-dollar chartered banks.

1. The SAB 121 capital trap: how accounting staff guidance sidelined Wall Street

To understand the scale of the disruption created by SAB 121, one must examine the intersection of SEC accounting guidance and prudential bank capital adequacy standards:

The mechanics of Topic 5.FF

Issued in April 2022 by the SEC’s Division of Corporation Finance and Office of the Chief Accountant, SAB 121 added Topic 5.FF to the Staff Accounting Bulletin series. It instructed reporting entities that safeguard crypto-assets for third parties to record:

1. A safeguarding obligation liability measured at the fair value of the custodied crypto-assets.
2. A corresponding safeguarding asset measured at the identical initial fair value, subject to impairment testing.

The SEC staff justified this treatment by asserting that safeguarding digital assets involved unique technological, legal, and regulatory risks—specifically the risk of private key theft, protocol exploits, and legal uncertainty regarding whether custodied crypto would be treated as property of the estate in bankruptcy proceedings under the US Bankruptcy Code.

The fatal collision with Basel III and the Supplementary Leverage Ratio (SLR)

For non-bank tech companies and pure crypto custodians, recording assets and liabilities at fair value was an administrative burden, but not a fatal balance-sheet impediment. For federally regulated commercial banks and bank holding companies, however, it was mathematically prohibitive.

Under Federal Reserve and OCC capital frameworks—specifically the Supplementary Leverage Ratio (SLR) and Tier 1 Risk-Weighted Asset (RWA) requirements—banks must maintain a minimum buffer of Tier 1 capital against total leverage exposure, regardless of risk weighting. A tier-1 custodian bank holding $25 billion of customer Bitcoin in segregated cold storage under SAB 121 was required to add $25 billion in assets and liabilities directly onto its regulatory balance sheet.

At a 5% to 6% leverage ratio requirement for G-SIBs, safeguarding that $25 billion would require the bank to hold roughly $1.25 billion to $1.5 billion in pristine, unencumbered Tier 1 equity capital simply to custody client assets that the bank did not own and could not lend. In traditional securities custody (equities, Treasuries, corporate bonds), assets held under fiduciary agreements sit strictly off-balance-sheet, incurring negligible capital charges. SAB 121 broke this foundational legal separation, creating an asymmetrical regulatory moat that handed 85%+ of institutional custody to non-bank trust companies.

2. The political and legislative showdown: H.J. Res. 109 to SAB 122

The economic distortion caused by SAB 121 sparked unprecedented bipartisan resistance across Capitol Hill and within the financial regulatory complex:

Congressional Review Act (CRA) challenge

In early 2024, the Government Accountability Office (GAO) issued a formal determination that SAB 121 constituted a “rule” under the Congressional Review Act (CRA), opening the door for congressional disapproval. In May 2024, the US House of Representatives voted 228–182, and the US Senate followed with a decisive 60–38 bipartisan vote, to pass House Joint Resolution 109 (H.J. Res. 109), invalidating the bulletin.

Although President Biden vetoed H.J. Res. 109 on May 31, 2024, citing concerns over SEC authority to protect investors, the overwhelming bipartisan vote signaled an unsustainable political status quo. Major custodian banks, led by BNY Mellon—the oldest bank in America with over $50 trillion in assets under custody—intensified discussions with SEC Chief Accountant Paul Munter.

The BNY Mellon precedent and bankruptcy remoteness

By late 2024, SEC staff began evaluating customized custody structures. The key legal milestone occurred when BNY Mellon demonstrated that its custody architecture utilized fully segregated, bankruptcy-remote digital asset accounts governed by contractual terms ensuring that assets would never become property of the bankruptcy estate under 11 U.S.C. § 541. Based on independent legal opinions and cryptographic key isolation, the SEC staff granted a targeted “no-objection” position to BNY Mellon for spot ETF and institutional client crypto assets.

Formal rescission: Staff Accounting Bulletin No. 122

Recognizing that granting one-off non-objection letters created an untenable supervisory disparity, the SEC Office of the Chief Accountant issued SAB 122 on January 23, 2025. SAB 122:

• Formally rescinded SAB 121 in its entirety, removing Topic 5.FF from the SAB series.
• Restored standard custody accounting treatment, aligning digital assets with traditional securities under established GAAP (specifically ASC 326 for credit/loss evaluations and ASC 450-20 for contingent liabilities).
• Allowed registrants to account for customer digital assets off-balance-sheet, accompanied by robust footnote disclosures detailing operational controls, insurance coverage, and cryptographic key administration.

3. The banking prerogative: OCC Interpretive Letters and legal authority

The SEC’s accounting rescission was only half of the solution; bank entry also required unequivocal clearance from banking prudential supervisors, primarily the Office of the Comptroller of the Currency (OCC).

Between 2020 and 2021, the OCC under Brian Brooks had issued Interpretive Letters 1170, 1172, and 1174, affirming that national banks could provide crypto custody and engage in node validation. However, in late 2021, the OCC under Acting Comptroller Michael Hsu published Interpretive Letter 1179, imposing a supervisory hurdle: banks could not engage in crypto activities without first obtaining written supervisory “non-objection” from their national bank examiner. This requirement caused bank applications to stall in administrative limbo.

In 2025, the OCC issued Interpretive Letter 1183 and companion guidance in Interpretive Letter 1184, which:

1. Clarified core custody powers: Reaffirmed that digital asset custody is a modern manifestation of traditional custodial and safe-keeping powers authorized under 12 U.S.C. § 24 (Seventh) and 12 U.S.C. § 92a.
2. Normalized examination standards: Shifted crypto custody from emergency discretionary approvals into the standard bank supervision cycle, evaluating banks on operational resilience, multi-party computation (MPC) key security, and cybersecurity governance.
3. Execution routing and sub-custody: Clarified that chartered banks may provide execution routing through registered broker-dealers or authorized execution venues, permitting an end-to-end custody and settlement service for institutional clients.

4. De-concentration of spot ETF custody and SEC Qualified Custodian rules

The immediate practical beneficiary of this regulatory reset has been the institutional ETF ecosystem.

Ending the single-point-of-failure risk

When the SEC approved the initial cohort of spot Bitcoin ETFs in January 2024 and spot Ethereum ETFs in July 2024, approximately 85% of all ETF issuers—including BlackRock (iShares), Fidelity, Franklin Templeton, and Grayscale—relied on Coinbase Custody Trust Company LLC as their primary custodian. While Coinbase provided institutional-grade cold storage, institutional risk officers, registered investment advisers, and the SEC’s Market Reg division frequently expressed concern over systemic single-custodian concentration.

Following the enactment of SAB 122 and OCC Letter 1183, major asset managers initiated dual-custody and multi-custodian redundancy agreements:

• BNY Mellon scaled its institutional custody engine, onboarding major digital asset funds and serving as primary reserve custodian for tier-1 stablecoins and spot ETF trusts.
• State Street and Northern Trust expanded institutional digital custody operations, providing seamless settlement between traditional securities, cash collateral, and spot crypto.
• Anchorage Digital Bank, N.A., as the only federally chartered crypto-native trust bank, expanded sub-custodial integration with traditional banking rails.

Alignment with the SEC Safeguarding Rule

Under the SEC’s proposed Safeguarding Rule (re-proposed amendments to Investment Advisers Act Rule 206(4)-2 / Rule 223-1), registered investment advisers are required to maintain client crypto assets with an authorized “Qualified Custodian.” The rule demands that qualified custodians maintain possession or control of client digital assets in a manner that protects them from claims in insolvency.

The presence of federally chartered national banks and trust institutions operating under off-balance-sheet fiduciary laws provides RIAs and family offices with the exact statutory bankruptcy-remoteness demanded by institutional compliance officers.

5. Tax reporting, Form 1099-DA, and cost basis tracking in bank custody

While bank custody solves regulatory capital and institutional balance sheet problems, it introduces new compliance operational obligations under federal tax law.

IRS Form 1099-DA broker reporting mandates

Under the Treasury Department’s final regulations governing digital asset broker reporting (Treas. Reg. § 1.6045-1), custodial brokers and banks are subject to phased reporting requirements:

• Gross proceeds reporting begins for covered transactions executed from calendar year 2025 onward.
• Cost basis reporting applies to covered digital assets acquired on or after January 1, 2026.

Custodial banks acting as brokers or facilitating digital asset dispositions must issue IRS Form 1099-DA to both taxpayers and the IRS.

The friction of self-custody transfers and basis isolation

A primary compliance challenge for institutional investors using bank custody is cost basis tracking across wallet boundaries:

1. Uncovered transfers: When an investor transfers Bitcoin from a self-hosted cold storage hardware wallet or an unhosted multisig address into a BNY Mellon or State Street custody vault, the receiving bank cannot independently certify the acquisition price or acquisition date under IRS standards.
2. Default treatment: Under IRS broker-reporting rules, transfers between unaffiliated non-broker wallets and custodial brokers do not automatically carry certified tax basis. Unless the taxpayer supplies contemporaneous books and records with cryptographic proof of ownership, the custodian may report the transfer without cost basis, leaving the taxpayer to substantiate basis manually on IRS Form 8949 (Sales and Other Dispositions of Capital Assets).
3. Lot-matching methodology: Institutional custodians require client fund managers to elect a specific identification accounting method (e.g., Specific Lot ID, FIFO, or Highest-In, First-Out) at the time of custody agreement execution, creating an audit-ready tax trail that satisfies both IRS examination standards and GAAP financial audit requirements.

6. Trading architecture for US and global participants

The institutionalization of crypto custody has bifurcated the execution and settlement architecture between US domestic entities and the global crypto ecosystem.

While institutional US asset managers utilize domestic qualified bank custodians for long-term vaulting and ETF backing, active execution, deep cross-asset derivatives liquidity, and dynamic yield generation frequently reside on global centralized trading venues. Market participants must maintain strict jurisdictional hygiene when evaluating venue connectivity, collateral management, and counterparty risks.

For international and eligible non-US participants navigating global exchange infrastructure:

Evaluating global liquidity on Binance

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Managing derivatives and risk architecture on Bybit

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7. Institutional custody checklist: practical takeaways for 2026

For corporate treasurers, registered investment advisers, and high-net-worth investors navigating the post-SAB 121 era, custodial selection requires rigorous operational due diligence:

1. Verify Qualified Custodian Status: Ensure that your custodial counterparty meets the statutory definition under the Investment Advisers Act. Confirm whether the entity operates as a federally chartered bank, a state-chartered trust company, or an OCC-regulated entity.
2. Demand Independent Bankruptcy-Remote Legal Opinions: Obtain explicit contractual warranties confirming that customer assets are held in segregated, non-fungible on-chain addresses that cannot be accessed by general creditors in the event of the custodian’s insolvency under 11 U.S.C. § 541.
3. Implement Multi-Custodian Architecture: Avoid single-custodian dependency. Institutional funds should maintain operational connectivity with at least two distinct custodial institutions—such as combining a specialized crypto-native custodian with a traditional G-SIB trust bank—to mitigate vendor downtime, staking lockups, and regulatory shifts.
4. Automate IRS Form 1099-DA Reconciliation: Establish real-time cryptographic audit trails connecting self-custody wallets, OTC execution desks, and bank custodial accounts. Maintain verifiable transfer logs to ensure cost basis is accurately reported on Form 8949 and Schedule D without relying solely on custodian-generated 1099 forms.
5. Audit Key Management and MPC Controls: Scrutinize the technical architecture of key sharding, quorum approval thresholds, geographic dispersion of HSMs (Hardware Security Modules), and disaster recovery protocols to protect against private key compromise.

The rescission of SAB 121 has returned American digital asset custody to the proven principles of fiduciary law. As the wall separating traditional finance from crypto infrastructure continues to erode, institutional participants who combine robust regulatory compliance with resilient custody architecture are best positioned to navigate the evolving market.