The CLARITY Act Just Removed the Last Accounting Rule Keeping Every Major Bank Out of Crypto Custody
In March 2022, the Securities and Exchange Commission issued Staff Accounting Bulletin Number 121 -- a single page of accounting guidance that effectively banned every publicly traded bank in the United States from offering Bitcoin and cryptocurrency custody services to its customers. The mechanism was simple and devastating: SAB 121 required any SEC-reporting company that holds cryptocurrency on behalf of customers to record those customer cryptocurrency holdings as liabilities on its own balance sheet, and to hold dollar-for-dollar capital against those liabilities. Under the Basel III capital framework, Bitcoin attracted the maximum 1250% risk weight -- meaning a bank that custodied $1 million of Bitcoin for a customer had to hold $1 million in its own capital as a buffer against that liability. The capital cost was so operationally infeasible that most SEC-reporting banks chose to forgo providing crypto custody altogether. Section 310 of the CLARITY Act -- confirmed in the official House Financial Services Committee Section-by-Section analysis and the Congressional Research Service analysis -- prevents federal regulators from requiring financial institutions to include customers' assets as liabilities on their balance sheets or hold additional capital against these assets, except as necessary to mitigate operational risks. The SEC issued SAB 122 in January 2025, which rescinded SAB 121 as a staff guidance matter. But staff guidance can be reversed by future staff in three days. Section 310 codifies the prohibition in permanent federal statute -- making it legally impossible for any future SEC, OCC, or Federal Reserve to reimpose the balance sheet penalty that kept the US banking system out of crypto custody for three years. The CLARITY Act is being covered as a market structure bill. Section 310 is the provision that makes bank crypto custody commercially viable at scale for the first time in American financial history.
01 -- SAB 121: The Single Page of Accounting Guidance That Changed Everything
Staff Accounting Bulletin Number 121 was issued by the SEC staff in March 2022 as interpretive guidance -- not a rule, not a regulation, not a statute, but a staff interpretation of how existing accounting standards should apply to crypto custody. The interpretation had two components, both operationally devastating for bank crypto custody.
The first component was the balance sheet classification. Under standard accounting practice, assets held in custody for customers are not recorded on the custodian's balance sheet -- they appear only in footnote disclosures as off-balance-sheet items. A bank that holds $10 billion in gold on behalf of its private wealth clients does not record that gold as a liability on its own balance sheet. SAB 121 reversed this standard practice for cryptocurrency: it required entities holding crypto in custody to record those holdings as both an asset representing the right to access the crypto and a corresponding liability representing the obligation to return it. The K2 Integrity analysis described this as undermining existing accounting practice whereby assets held in custody were previously not required to be recorded on a custodian's balance sheet.
The second component was the capital requirement cascade. By recording customer cryptocurrency holdings as balance sheet liabilities, SAB 121 triggered the Basel III risk-based capital framework. Bitcoin attracted a 1250% risk weight -- meaning for every $1 of Bitcoin held in custody for a customer, a bank must hold $12.50 of its own capital. For a bank holding $100 million of Bitcoin for customers, the capital requirement was $1.25 billion -- capital that cannot be invested and generates no return beyond the custody fee.
The combined effect: a custody fee of 0.5% annually on $100 million in Bitcoin generates $500,000 in annual revenue. Holding $1.25 billion in idle capital to support that service has an opportunity cost of approximately $56 million annually at a 4.5% risk-free rate. No business can operate profitably when the opportunity cost of the regulatory capital requirement is 112 times the annual revenue of the service. Most large publicly traded banks chose to forgo crypto custody entirely rather than accept this capital penalty.
SAB 121 Capital Math: Customer holds $100M Bitcoin in bank custody. SAB 121 requires bank to record $100M liability on its own balance sheet. 1250 percent risk weight requires $1.25B in bank capital held idle. Annual custody fee: $500K. Opportunity cost of $1.25B idle capital at 4.5 percent: $56M. Result: operationally infeasible. Every major publicly traded bank chose not to offer crypto custody.
02 -- The Political Battle Over SAB 121: How Staff Guidance Survived Three Years
SAB 121's survival from March 2022 to January 2025 despite near-universal industry criticism, bipartisan congressional opposition, and a GAO ruling that it should have gone through formal rulemaking is one of the more illuminating examples of how financial regulation can persist through institutional entrenchment.
In May 2024, the US House of Representatives passed House Joint Resolution 109 -- a Congressional Review Act resolution to overturn SAB 121 -- with a rare bipartisan majority of 228 to 182. The resolution attracted 21 Democratic members alongside the Republican majority. In June 2024, the US Senate passed the same resolution 60 to 38 -- surpassing the 60-vote filibuster threshold. President Biden vetoed the resolution, citing financial stability concerns.
The Biden veto meant that a bipartisan congressional majority sufficient to pass the Senate's 60-vote threshold had voted to repeal SAB 121, but the repeal was blocked by a single presidential action. The GAO had separately ruled in October 2023 that SAB 121 was a rule subject to the Congressional Review Act's procedures -- meaning the SEC had issued it without the required notice-and-comment rulemaking period. Despite the GAO ruling, the Biden-era SEC maintained SAB 121 through the end of the administration.
SAB 122, issued by the new SEC leadership on January 23, 2025 -- three days after President Trump took office -- rescinded SAB 121 and replaced it with standard accounting treatment for custody liabilities. Under SAB 122, financial institutions assess their crypto custody risks using recognition and measurement requirements for contingencies set forth in existing FASB and IAS guidance -- the same standards that apply to all other custody activities.
03 -- Section 310: Why Staff Guidance Is Not Enough and Statute Is Required
SAB 122 resolved the immediate operational problem of SAB 121 for the current administration. Section 310 of the CLARITY Act resolves the structural problem permanently -- by making it legally impossible for any future administration to reimpose the balance sheet penalty through staff guidance, formal rulemaking, or any other regulatory mechanism.
The distinction between SAB 122 as staff guidance and Section 310 as federal statute is the most commercially significant aspect of the CLARITY Act's custody provisions for institutional investors making long-term infrastructure decisions. A bank that decides to build out crypto custody infrastructure based on SAB 122 is making that decision knowing that SAB 122 can be reversed by the next SEC administration in the same way that SAB 122 reversed SAB 121 -- by issuing a new staff guidance document. No bank's board of directors will approve a multi-year infrastructure investment based on staff guidance that the next administration can reverse in three days.
The official House Financial Services Committee Section-by-Section analysis of the CLARITY Act confirmed the statutory scope of Section 310: it prevents federal regulators -- specifically including the banking regulators and the SEC -- from requiring certain financial institutions that custody digital assets to treat such assets as balance sheet liabilities. The Congressional Research Service analysis confirmed the statutory comparison: aspects of this provision are similar to SAB 122 that rescinded SAB 121. Section 310 codifies in permanent federal statute the same accounting treatment that SAB 122 established through staff guidance. The codification makes the accounting treatment permanently stable regardless of future SEC staffing changes, administration changes, or regulatory philosophy shifts.
The exception that Section 310 preserves -- except as necessary to mitigate operational risks -- is the appropriate regulatory safety valve. Banking regulators retain the authority to impose capital requirements genuinely related to operational risk in crypto custody: key management failures, cybersecurity breaches, or operational errors. What they cannot do under Section 310 is impose capital requirements based on the volatility of the underlying crypto assets or the theoretical credit exposure from treating customer holdings as balance sheet liabilities.
Section 310 vs SAB 122: SAB 122 rescinded SAB 121 through staff guidance in January 2025. Staff guidance can be reversed in three days by the next administration. Section 310 codifies the same prohibition in permanent federal statute. No future SEC can reimpose the SAB 121 balance sheet penalty without amending the CLARITY Act through Congress. The infrastructure investment becomes permanently viable.
04 -- Section 312: The Bank Holding Company Act Amendment That Enables Full-Service Bank Crypto
Section 310's balance sheet liability prohibition works in conjunction with Section 312 -- a narrowly crafted amendment to the Bank Holding Company Act that allows non-bank subsidiaries of bank holding companies to engage in digital commodity activities that are financial in nature.
The Bank Holding Company Act limits the activities that bank holding companies and their non-bank subsidiaries can engage in to activities that are closely related to banking. Digital commodity custody, brokerage, and dealing could theoretically have been challenged as activities outside the Bank Holding Company Act's permissible scope -- creating another regulatory barrier to bank entry alongside SAB 121's balance sheet penalty.
Section 312's amendment explicitly classifies digital commodity activities as financial in nature -- placing them within the category of activities that bank holding company non-bank subsidiaries can engage in. This enables the full-service bank crypto model that Section 310's balance sheet relief makes economically viable: a bank holding company can establish a non-bank subsidiary specifically for digital asset custody, brokerage, and dealing, fund it with appropriate capital, and offer the complete range of digital asset services to its clients without the dual barriers of SAB 121's capital penalty and the Bank Holding Company Act's activity restrictions.
The practical implication: JPMorgan, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup can all build out comprehensive digital asset custody and brokerage businesses through non-bank subsidiaries with permanent statutory authorization and without the balance sheet penalty that made such businesses economically unviable under SAB 121.
05 -- The Commercial Scale: What Full Bank Crypto Custody Means for the Market
Section 310 transforms the question of whether banks will enter the crypto custody market from a regulatory question to a commercial question. JPMorgan manages approximately $3 trillion in assets under management through its asset management division. If even 5% of JPMorgan's asset management clients -- $150 billion -- want crypto custody exposure through a regulated bank custodian, and if the custody fee is 0.5% annually, that represents $750 million in annual custody revenue. Under Section 310 as permanent federal statute, JPMorgan's board evaluates that infrastructure investment with the assurance that the accounting treatment is permanently stable.
The aggregated commercial opportunity across all major US bank holding companies is substantially larger. Bank of America serves 68 million consumer and small business clients. Wells Fargo serves approximately 70 million customers. Morgan Stanley manages $4.7 trillion in client assets. Goldman Sachs manages $2.8 trillion. The total AUM managed by or custodied at major US bank holding companies is measured in tens of trillions. The proportion that will migrate toward crypto custody as the asset class matures -- even at a conservative 1% to 2% allocation -- represents hundreds of billions of dollars in crypto assets seeking bank custody services. Section 310 is the provision that makes offering those custody services commercially viable for every bank holding company in the United States.
K2 Integrity's analysis noted that with banks poised to enter the realm of crypto custody, digital asset native custody providers face increased competition. This competitive pressure from incumbent banks entering the crypto custody market -- enabled by Section 310's permanent statutory protection and Section 312's Bank Holding Company Act amendment -- is the commercial force that will drive the winner-take-most dynamics documented in the Alain AI Lab custody layer report.
06 -- The Regulatory Reset: How Section 310 Fits the Complete Picture
Section 310 is the statutory codification of the final piece of a comprehensive regulatory reset that began in January 2025. The Ankura analysis documented the sequence: SAB 122 in January 2025 rescinded SAB 121's balance sheet penalty. In March 2025, the FDIC rescinded Financial Institution Letter-16-2022, which had required FDIC-supervised institutions to obtain supervisory feedback before engaging in crypto-related activities. The OCC issued interpretive letters confirming that nationally chartered banks can custody crypto assets and issue stablecoins. The Federal Reserve, FDIC, and OCC issued joint guidance in March 2026 confirming technology-neutral capital treatment for tokenized securities. And Section 310 codifies the balance sheet liability prohibition in permanent federal statute.
Each regulatory action removed a specific barrier to bank crypto adoption. SAB 122 removed the accounting liability barrier. The FDIC letter removal removed the prior approval barrier. The OCC interpretive letters removed the activity authorization barrier. The technology-neutral capital treatment ruling removed the tokenized asset barrier. Section 310 makes all of these removals permanent by encoding the most commercially significant one in federal statute that cannot be reversed without congressional action.
07 -- Conclusion: The Provision That Unlocks Hundreds of Millions of Clients
The three reports in this CLARITY Act series have mapped three distinct provisions that each address a different dimension of crypto adoption. Section 605 protects the individual's right to self-custody their own assets against future government restriction. Sections 309, 409, and 604 protect the developers and validators who build the blockchain infrastructure that makes crypto function. And Section 310 removes the accounting rule that prevented the largest financial institutions in the world from offering crypto custody to their clients.
Together these three provisions address the complete institutional adoption stack: the individual holding layer, the infrastructure building layer, and the institutional service layer. Section 605 ensures individuals can hold their own assets. Sections 309 and 604 ensure builders can build the infrastructure. Section 310 ensures banks can offer custody services to the clients who want institutional-grade access.
When all three provisions are in force simultaneously -- when the CLARITY Act is signed -- the barriers to comprehensive crypto adoption from individual to infrastructure to institution are permanently removed by statute. The biggest financial institutions in the world are about to onboard hundreds of millions of people into crypto. Section 310 is the provision that makes it commercially viable for them to do it.
SAB 121 March 2022: forced banks to record customer crypto as balance sheet liabilities with 1250 percent risk weight capital. Operationally infeasible. Every major bank declined crypto custody. SAB 122 January 2025: rescinded by staff guidance. Can be reversed in three days. Section 310 CLARITY Act: permanent federal statute. No future SEC can reimpose the balance sheet penalty. Hundreds of millions of bank clients gain access.