SEC issues SAB 121 on digital asset custodial obligations
Defining Issues | March 2022
Requires entities undertaking certain digital asset custodial activities to record a safeguarding liability and asset.
Initial and subsequent measurement of the safeguarding obligation liability and related asset will be based on the fair value of the custodied digital assets.
Applicability
SAB 121 applies to financial statements prepared under either US GAAP or IFRS® Standards for:
- Existing registrants
- Entities that have submitted or filed a not-yet-effective registration statement
- Other entities and financial statements as specified by the SAB
Relevant dates
Existing registrants apply SAB 121 to financial statements for interim and annual periods ending after June 15, 2022, with retrospective application, at a minimum, to the beginning of the fiscal year.
Other entities subject to SAB 121 apply it in their next submission or filing. Retrospective application is required to either:
- the beginning of the most recent annual period ending before June 15, 2022 when a subsequent interim period is presented; or
- the beginning of the two most recent annual periods ending before June 15, 2022 when a subsequent interim period is not presented.
Key Impacts:
Recognition and measurement:
- An issuer that holds digital assets for others recognizes (1) the custodied digital assets and (2) a liability to return those assets if it ‘controls’ them.
- An issuer that holds digital assets for others, but does not ‘control’ them, recognizes (1) a liability for its obligation to safeguard the digital assets and (2) a corresponding asset. This reflects the SEC staff’s view that safeguarding digital assets presents unique risks and uncertainties not present in arrangements to safeguard other assets.
- The liability is measured initially and subsequently at the ASC 820 fair value of the digital assets held; as, in general, is the corresponding asset.
Disclosures:
- How the issuer is accounting for the safeguarding liability and asset, and the effects of initially applying the SAB.
- Nature and amount of each significant digital asset that the issuer is responsible for safeguarding for others, as well as any vulnerabilities that the issuer has from any concentration of such activities.
- Required fair value measurement disclosures under ASC 820.
- Who (e.g. the company, its agent or another third party) holds the cryptographic keys, maintains the internal recordkeeping of those assets, and is obligated to secure the assets and protect them from loss or theft.
- Significant risks and uncertainties associated with the issuer’s safeguarding of digital assets for others.
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Evaluating custody of digital assets
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