SAB-121 was cancelled. What Comes Next?

Initially introduced by the Securities and Exchange Commission (SEC), SAB-121 required banks holding cryptocurrencies for customers to record these assets as liabilities on their balance sheets. This regulatory approach significantly discouraged banks from offering crypto custody services due to increased capital requirements.

With the recent reversal of SAB-121, banks and financial institutions are now reevaluating their approach to digital asset custody. The cancellation carries both legal and technical consequences, impacting balance sheet management, risk exposure, cybersecurity measures, and the broader regulatory framework governing crypto-related financial services. This article explores the full extent of these changes and what they mean for the banking industry - together with a couple of predictions.

Why it's important for Banks and TradFi?

With SAB-121 revoked, banks are no longer required to list digital assets held for customers as liabilities, freeing up capital and improving balance sheet flexibility. This brings digital asset custody more in line with traditional custodial services, reducing the regulatory burden. However, it also raises the question of how regulators like the Federal Reserve, OCC (Office of the Comptroller of the Currency), and FDIC will respond to the policy shift.

Many industry stakeholders have argued that the SEC lacked the authority to impose this requirement, as it interfered with banking regulations typically overseen by prudential regulators. The cancellation may weaken the SEC’s influence over future banking-related digital asset regulations, shifting more control to the Basel Committee, state regulators, and Congress.

The cancellation of SAB-121 reopens the path for banks to offer institutional-grade digital asset custody without the punitive accounting measures. Banks can now integrate off-chain and on-chain verification systems, enhancing transparency and reducing counterparty risk. Stablecoin reserves and liquidity provisioning strategies may also change, as banks consider new models for crypto-backed financial products.

Security & Risk Management Adjustments

With increased flexibility in crypto custody, banks will need to strengthen security protocols to mitigate risks associated with digital asset storage. This includes:

• Enhancing cold storage and multi-signature solutions.
• Implementing real-time monitoring for fraudulent transactions.
• Aligning with cybersecurity standards from NIST, ISO, and federal agencies.

This shift could lead to greater collaboration between traditional finance (TradFi) and decentralized finance (DeFi), with banks exploring hybrid custody models that integrate smart contract-based asset management.

Crypto industry is excited. The potential is huge. Isn't it?

"Previously, the requirement to reflect clients’ crypto assets on the company’s own balance sheet created significant complexities. Now, the process is simplified, reducing costs and time, making it easier to integrate crypto products into operations," - Adam Berker, a Head of Legal at Scalable Solutions.

The cancellation of SAB-121 is not an isolated event - it signals a broader regulatory and market shift that will have cascading effects across the financial sector.

Banks Will Expand Crypto Custody Services, but With Selective Risk Models

Historically, major financial institutions have taken a cautious approach toward digital asset custody. The initial reluctance of banks like JPMorgan and Goldman Sachs to engage in crypto custody was driven by regulatory uncertainty, similar to what we saw before the approval of Bitcoin ETFs. Now, with the removal of SAB-121, expect to see selective expansion, where only assets deemed regulatory-friendly—such as Bitcoin and Ethereum—are prioritized for custody.

Technical considerations like proof-of-reserve mechanisms, multi-party computation (MPC), and real-time auditing will likely become industry standards for banks to gain regulatory approval for expanded custody operations.

The SEC Will Pivot Towards More Comprehensive Digital Asset Regulation

The SEC’s decision to repeal SAB-121 does not imply a reduced focus on digital assets. Instead, it is likely that the agency will push for broader regulatory oversight, similar to how the CFTC established clearer guidelines following the repeal of outdated commodity rules.

Expect regulatory frameworks that:

• Introduce mandatory segregated custody models, preventing co-mingling of customer and institutional assets.
• Implement stricter AML/KYC requirements for self-hosted wallets, in line with FATF recommendations.
• Demand on-chain surveillance tools for real-time monitoring of transactions, similar to how Chainalysis and TRM Labs provide compliance-grade analytics.

More Banks Will Integrate Blockchain-Based Settlement Systems

With fewer balance sheet restrictions, banks may shift towards using blockchain-based financial rails. The cancellation of SAB-121 allows them to participate in on-chain settlements, reducing reliance on traditional intermediaries like SWIFT. We are already seeing this shift through pilot programs such as:

• JPMorgan’s Onyx network, which uses tokenized deposits for real-time interbank settlements
• BNY Mellon’s blockchain custody, which is integrating Ethereum-based settlement protocols
• Project Guardian, where institutions like Citi and DBS are testing asset tokenization frameworks

Expect to see major banks either developing their own blockchain-based rails or partnering with existing networks like Fireblocks and R3 Corda to improve cross-border transactions and liquidity management.

The Stablecoin Market Will See Increased Institutional Adoption

With banks now free from the capital-intensive restrictions imposed by SAB-121, they are likely to increase their involvement in the stablecoin ecosystem. Major institutions may adopt models similar to:

• Circle’s USDC reserve structure, which relies on segregated bank reserves.
• JPMorgan’s JPM Coin, used for interbank transactions but potentially scalable for retail use.
• Regulated bank-issued stablecoins, such as the potential U.S. Fed-backed stablecoin under discussion - but this step may potentially reduce the profits for the system in general.

As banks experiment with stablecoin reserves, integration with CBDCs (Central Bank Digital Currencies) will also accelerate, potentially creating a hybrid model of state-backed and privately issued digital dollars.

Crypto-Native Custodians Will Face Increased Competition

Firms like Anchorage Digital, Coinbase Custody, and BitGo built their businesses under the assumption that traditional banks would remain on the sidelines. Now, with the repeal of SAB-121, expect banks to enter the space aggressively, leading to:

• Increased competition on institutional crypto custody fees.
• A shift in custody preferences from third-party custodians to in-house bank solutions.
• Potential mergers and acquisitions, where banks absorb existing crypto-native custodians for expertise and infrastructure.

A Surge in Banking Compliance Tech and Digital Asset Risk Analytics

As banks expand their crypto operations, they will require more sophisticated risk management and compliance tools. We can expect:

• Widespread adoption of real-time risk scoring tools, similar to those developed by Elliptic and TRM Labs.
• Integration of AI-driven fraud detection, where banks use machine learning to flag suspicious transactions before settlement.
• Stronger digital asset insurance frameworks, with major insurers offering expanded policies covering custodial risks.

Banks will need custom-built compliance stacks, ensuring they meet regulatory expectations while minimizing exposure to security risks.

Congress or the Federal Reserve May Introduce a Replacement Framework

While the SEC has repealed SAB-121, Congress or the Federal Reserve may step in to introduce a replacement framework. Historical patterns suggest that when a regulation is repealed without a replacement, another regulatory body steps in to fill the vacuum.

Expect the Federal Reserve or FDIC to issue new guidance on:

• How banks should manage on-chain assets without triggering systemic risk.
• New capital adequacy requirements for digital asset custodians, potentially aligning with Basel III.
• Requirements for interbank crypto settlements, ensuring compliance with financial stability mandates.

The cancellation of SAB-121 is not the end of digital asset regulation in banking - it is the beginning of a new phase. Banks will cautiously re-enter the crypto custody market, leveraging improved compliance tools, blockchain-based settlement mechanisms, and institutional stablecoin frameworks. However, the absence of clear regulatory replacements means we are likely to see new rules emerge from the SEC, the Federal Reserve, or even legislative action from Congress.

Financial institutions must remain vigilant, preparing for both opportunities and regulatory pivots as the post-SAB-121 landscape unfolds. As blockchain adoption continues to rise, banks will need to adopt best-in-class compliance, security, and risk management frameworks to stay ahead of the curve - and all of that with cutting-edge technologies onboarded.