# How Does SAB 122 Change the Competitive Landscape for Crypto Custodians? ▴ Question

**Published:** 2025-08-09
**Categories:** Question

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## Concept

The fundamental challenge in safeguarding digital assets has always been one of representation. An institution holding billions in client securities does not reflect those holdings as its own assets and liabilities; they are off-balance-sheet items, held in trust. The system operates on a shared understanding of property rights and custodial duties.

When cryptographic assets entered the institutional domain, they introduced novel risks tied to their technological underpinnings, prompting regulators to question if the old representations were sufficient. This question led the U.S. [Securities and Exchange Commission](https://prime.greeks.live/area/securities-and-exchange-commission/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to issue [Staff Accounting Bulletin 121](https://prime.greeks.live/area/staff-accounting-bulletin-121/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), a directive that fundamentally altered the financial picture for any public company acting as a crypto custodian.

[SAB 121](https://prime.greeks.live/area/sab-121/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) mandated a radical departure from traditional custodial accounting. It required that entities safeguarding crypto-assets for users present those assets directly on their own balance sheets, accompanied by a corresponding liability of equal fair value. This decision was rooted in a specific view of risk ▴ the technological and legal uncertainties surrounding crypto were deemed so significant that the obligation to a client created a unique, balance-sheet-level event for the custodian.

The assets were not considered bankruptcy remote in the same way as traditional securities, meaning that in a failure scenario, they could potentially be treated as part of the bankrupt custodian’s estate, exposing clients to loss. The SEC staff’s solution was to make this risk visible by inflating the custodian’s [balance sheet](https://prime.greeks.live/question/how-does-the-shift-toward-riskless-principal-trading-affect-a-dealers-balance-sheet-and-profitability-model/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to reflect the full value of the assets it held.

> The core effect of SAB 121 was to transform a custodian’s client assets into its own balance sheet assets and liabilities, altering its fundamental financial structure.

However, this created a profound systemic distortion, particularly for highly regulated banking institutions. For these entities, the size of their balance sheet is a critical input for calculating [regulatory capital](https://prime.greeks.live/area/regulatory-capital/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) requirements. By forcing them to absorb client crypto holdings onto their books, SAB 121 made [crypto custody](https://prime.greeks.live/area/crypto-custody/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) a capital-intensive, and therefore economically challenging, business line. This unintentionally erected a significant barrier, effectively preventing many of the world’s most established custodians from participating at scale in the digital asset market.

Recognizing this distortion, the regulatory pendulum has swung back. The recent issuance of [Staff Accounting Bulletin](https://prime.greeks.live/question/what-is-the-role-of-front-office-staff-in-identifying-behavioral-risk-triggers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) 122 formally rescinds SAB 121, dismantling the on-balance-sheet mandate and resetting the competitive field. This reversal signals a move away from bespoke accounting rules for crypto and toward the application of existing, risk-based financial principles, profoundly reshaping the strategic decisions for all market participants.

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## Strategy

The issuance and subsequent rescission of SAB 121 created two distinct strategic eras for crypto custodians. The first, under the bulletin’s mandate, was an environment of regulatory arbitrage and structural defense. The second, initiated by [SAB 122](https://prime.greeks.live/area/sab-122/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), is a return to open competition, where operational excellence and institutional trust are the primary currencies. Understanding the strategic calculus in both eras is essential to grasping the current competitive dynamics.

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## The Strategic Landscape Forged by SAB 121

Under the SAB 121 regime, the competitive landscape was defined not by technology or service alone, but by the nature of a firm’s regulatory charter. The on-balance-sheet requirement created a stark divide between two primary archetypes of custodians ▴ traditional banking organizations and crypto-native firms.

- 
**Regulated Banking Institutions** found themselves at a severe strategic disadvantage. Their primary challenge was the direct impact on regulatory capital. A bank holding $1 billion in client Bitcoin would be forced to add $1 billion in assets and $1 billion in liabilities to its balance sheet. This expansion would require the bank to hold more capital against these assets, effectively “trapping” capital that could otherwise be used for lending or other core banking activities. This made crypto custody a prohibitively costly service, forcing many to either shelve their ambitions or offer services at a non-competitive price point. Their strategy became one of lobbying for regulatory change and exploring complex, off-shore structures to mitigate the bulletin’s impact.

- 
**Crypto-Native Custodians**, while still subject to the accounting rule if they were public entities, operated under a different set of constraints. Lacking a banking charter, they were not subject to the same stringent, balance-sheet-linked capital adequacy ratios. The inflation of their balance sheets was an accounting nuisance that complicated financial reporting, but it did not carry the same punitive economic weight. This structural difference handed them a significant competitive advantage. Their strategy was to capitalize on this regulatory moat, scaling their custody businesses to capture market share from the sidelined banking giants. They could price their services more aggressively and integrate them with other crypto-native offerings like staking and DeFi access.

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## A New Competitive Arena Post-SAB 122

The rescission of SAB 121 via SAB 122 demolishes the regulatory wall that separated these two groups. By removing the on-balance-sheet mandate, the new bulletin allows client crypto assets to be treated as what they are ▴ assets under custody, not assets of the custodian. This levels the playing field and forces a complete strategic realignment for all participants.

> With the removal of the on-balance-sheet mandate, the primary basis of competition shifts from regulatory structure to operational capability and institutional trust.

The new directive points entities toward existing accounting standards for loss contingencies, like [FASB ASC 450-20](https://prime.greeks.live/area/fasb-asc-450-20/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This requires a nuanced, risk-based assessment of potential losses rather than a blanket on-balance-sheet rule. The strategic focus now shifts to how firms manage and disclose these risks.

The table below outlines the strategic shifts for the two primary custodial archetypes following the implementation of SAB 122.

| Strategic Dimension | Regulated Banking Institutions (Post-SAB 122) | Crypto-Native Custodians (Post-SAB 122) |
| --- | --- | --- |
| Balance Sheet Impact | Client crypto assets are moved off-balance-sheet. The primary focus shifts to assessing and disclosing contingent liabilities for loss, a familiar process for banks. | Client assets are removed from the balance sheet, simplifying financial statements and improving key metrics like return on assets. |
| Regulatory Capital | Capital is freed up, as it is no longer tied to the fair value of custodied crypto assets. This makes the business line economically viable and scalable. | While less impacted initially, the change removes a key competitive differentiator they held over banks. Their capital advantage is neutralized. |
| Competitive Strategy | Leverage brand trust, existing institutional relationships, and massive capital bases to enter the market aggressively. Compete on security, reliability, and integration with traditional financial services. | Shift from competing on regulatory grounds to competing on technological superiority. Focus on value-added services like staking-as-a-service, DeFi integration, and support for a wider range of esoteric assets. |
| Market Opportunity | The path is now clear to serve as custodians for major financial products like spot Bitcoin and Ether ETPs, a role they were largely precluded from under SAB 121. | Face intense new competition from the world’s largest financial institutions. The opportunity lies in being more agile and innovative, serving segments of the market that banks are slower to address. |

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## Execution

The transition from a SAB 121 to a SAB 122 world is not merely a change in accounting theory; it demands a significant overhaul of operational and risk management frameworks. For institutions, execution is paramount. This involves a granular reassessment of balance sheet mechanics, risk modeling, and client disclosure protocols. The focus shifts from the blunt instrument of on-balance-sheet recognition to the precision tooling of [contingent liability](https://prime.greeks.live/area/contingent-liability/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) analysis.

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## The Balance Sheet Transformation in Practice

The most immediate and tangible execution item is the reconfiguration of the balance sheet. Under SAB 121, the process was straightforward, albeit punitive. The rescission requires a more nuanced approach.

The following table illustrates the effect on a hypothetical custodian, “Institutional [Digital Asset](https://prime.greeks.live/area/digital-asset/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Services (IDAS) Inc. ” holding $1 billion in client crypto assets.

| Balance Sheet Item | Treatment under SAB 121 | Treatment under SAB 122 |
| --- | --- | --- |
| Assets | Cash ▴ $50M Other Assets ▴ $150M Crypto-Asset Safeguarding Asset ▴ $1B Total Assets ▴ $1.2B | Cash ▴ $50M Other Assets ▴ $150M Total Assets ▴ $200M |
| Liabilities & Equity | Other Liabilities ▴ $50M Crypto-Asset Safeguarding Liability ▴ $1B Shareholder Equity ▴ $150M Total Liabilities & Equity ▴ $1.2B | Other Liabilities ▴ $50M Shareholder Equity ▴ $150M Total Liabilities & Equity ▴ $200M |
| Key Financial Footnote | Disclosure of the nature and fair value of crypto-assets held, as mandated by SAB 121. | Disclosure of the accounting policy for safeguarding obligations, including the methodology for assessing contingent liabilities for loss under FASB ASC 450-20. May include quantitative details if a loss is probable and estimable. |

This transformation has profound downstream effects. A bank executing this change sees its total assets shrink dramatically, which in turn reduces its risk-weighted assets (RWAs) and boosts its capital ratios, freeing up immense capacity for other business lines.

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## Operationalizing Contingent Liability Assessment

Moving to a framework based on FASB ASC 450-20 requires a robust, defensible, and auditable process for evaluating the risk of loss. This is a far more complex task than the simple fair-value recognition required by SAB 121. Institutions must now execute a multi-stage operational plan.

- 
**Risk Identification and Classification** ▴ The first step is to systematically identify all potential sources of loss related to crypto custody. This is not a trivial task.

<li>**Technological Risks** ▴ Private key compromise, software bugs in wallet architecture, 51% attacks on a specific blockchain.

- **Legal and Regulatory Risks** ▴ Ambiguity in property rights across jurisdictions, potential for frozen or seized assets due to sanctions or law enforcement actions.

- **Third-Party Risks** ▴ Failures of sub-custodians or other vendors in the custody chain.

- **Operational Risks** ▴ Internal fraud, human error in transaction processing.

</li>
- 
**Probability Assessment** ▴ For each identified risk, the institution must develop a methodology to assess the probability of a loss event occurring. This will involve both quantitative analysis (e.g. historical data on blockchain forks) and qualitative judgment from technology and legal experts. The assessment will classify risks into the standard buckets ▴ “probable,” “reasonably possible,” and “remote.”

- 
**Loss Estimation** ▴ If a loss is deemed probable, the firm must be able to reasonably estimate the financial impact. This is complex for crypto-assets, as the value can be highly volatile, and a loss event might impact only a specific subset of client holdings.

- 
**Accrual and Disclosure** ▴ Based on the assessment, an execution decision is made.

<li>If a loss is **probable and estimable**, a liability must be accrued on the balance sheet.

- If a loss is **reasonably possible**, no accrual is made, but the nature of the contingency must be described in detail in the financial statement footnotes.

- If a loss is **remote**, no disclosure is typically required.

</li>

> The operational pivot to SAB 122 requires custodians to build a sophisticated risk quantification framework to satisfy the principles of contingent liability accounting.

This new operational requirement creates a different kind of competitive dynamic. The winners will be the institutions that can demonstrate the most robust and sophisticated risk management processes to their clients, auditors, and regulators. Banks may have an advantage here, as they have decades of experience in modeling and disclosing complex financial risks. Crypto-native firms will need to invest heavily in these capabilities to prove their institutional readiness in a world where regulatory moats have been removed.

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## References

- “One of the First Moves of President Trump’s SEC Was Rescinding Staff Accounting Bulletin 121, Making it Easier to Custody Crypto-Assets – Blockchain.” Lexology, 3 February 2025.

- Gavis, Adam, et al. “SEC Staff Accounting Bulletin No. 121 ▴ Why Aren’t Banks Rushing into Crypto Custody?” Thomson Reuters, 10 June 2024.

- “SEC Rescinds Staff Accounting Bulletin 121 (SAB 121) on Crypto Custody Accounting.” Practical Law, Thomson Reuters, 24 January 2025.

- “SEC repeals controversial crypto accounting rules for banks.” ABA Banking Journal, 23 January 2025.

- Gavis, Adam. “Gensler Defends SEC Staff Accounting Bulletin on Crypto After GAO Report Deems it a Rule.” Thomson Reuters, 13 December 2023.

- Financial Accounting Standards Board. “ASC 450-20 ▴ Contingencies – Loss Contingencies.” FASB Accounting Standards Codification.

- U.S. Securities and Exchange Commission. “Staff Accounting Bulletin No. 121.” 31 March 2022.

- U.S. Securities and Exchange Commission. “Staff Accounting Bulletin No. 122.” 23 January 2025.

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## Reflection

The brief and tumultuous life of SAB 121 serves as a powerful case study in the maturation of a new asset class within an established regulatory architecture. Its implementation and subsequent rescission are not merely technical adjustments in accounting; they represent a systemic recalibration. The initial bulletin reflected a regulator grappling with novel risks by using a familiar, if ill-suited, tool ▴ the balance sheet. The result was a market distortion, a testament to the law of unintended consequences.

The arrival of SAB 122, and the reversion to principles-based standards like FASB ASC 450-20, marks a significant intellectual shift. It suggests an acknowledgment that digital assets, while unique, do not necessarily require the invention of an entirely new regulatory physics. Instead, the existing frameworks for risk assessment and disclosure, honed over decades, can be adapted and applied. This places the onus back on the institutions themselves.

The central question for a custodian is no longer about adherence to a prescriptive rule, but about the demonstrable quality of its internal risk analysis. How robust is your model for quantifying the probability of a private key compromise? How do you translate the legal ambiguities of a specific protocol into an estimable contingent liability? The answers to these questions will now define institutional leadership and build the client trust that underpins the entire custodial ecosystem.

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## Glossary

<a href="https://prime.greeks.live/area/securities-and-exchange-commission/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Securities and Exchange Commission

Meaning ▴ The Securities and Exchange Commission (SEC) is the principal federal regulatory agency in the United States, established to protect investors, maintain fair, orderly, and efficient securities markets, and facilitate capital formation. </a><a href="https://prime.greeks.live/area/staff-accounting-bulletin-121/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Staff Accounting Bulletin 121

Meaning ▴ Staff Accounting Bulletin (SAB) 121 is a guidance issued by the U. </a><a href="https://prime.greeks.live/area/sab-121/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Sab 121

Meaning ▴ Refers to Staff Accounting Bulletin No. </a><a href="https://prime.greeks.live/question/how-does-the-shift-toward-riskless-principal-trading-affect-a-dealers-balance-sheet-and-profitability-model/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Balance Sheet

The shift to riskless principal trading transforms a dealer's balance sheet by minimizing assets and its profitability to a fee-based model. </a><a href="https://prime.greeks.live/area/regulatory-capital/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Regulatory Capital

Meaning ▴ Regulatory Capital, within the expanding landscape of crypto investing, refers to the minimum amount of financial resources that regulated entities, including those actively engaged in digital asset activities, are legally compelled to maintain. </a><a href="https://prime.greeks.live/area/crypto-custody/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Crypto Custody

Meaning ▴ Crypto Custody involves the secure storage and expert management of cryptographic private keys that grant access to and control over digital assets on behalf of an individual or institutional client. </a><a href="https://prime.greeks.live/question/what-is-the-role-of-front-office-staff-in-identifying-behavioral-risk-triggers/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Staff Accounting Bulletin

Front-office staff serve as human sensors, identifying behavioral anomalies that signal deviations from rational risk-taking. </a><a href="https://prime.greeks.live/area/sab-122/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Sab 122

Meaning ▴ While Staff Accounting Bulletin No. </a><a href="https://prime.greeks.live/area/fasb-asc-450-20/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Fasb Asc 450-20

Meaning ▴ A specific section of the Financial Accounting Standards Board (FASB) Accounting Standards Codification that provides guidance on accounting for loss contingencies. </a><a href="https://prime.greeks.live/area/contingent-liability/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Contingent Liability

Meaning ▴ A Contingent Liability is a potential financial obligation arising from past events that depends on the occurrence or non-occurrence of one or more future events for confirmation. </a><a href="https://prime.greeks.live/area/digital-asset/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Digital Asset

Meaning ▴ A Digital Asset is a non-physical asset existing in a digital format, whose ownership and authenticity are typically verified and secured by cryptographic proofs and recorded on a distributed ledger technology, most commonly a blockchain. </a>

**Tags:** [Contingent Liability](https://options.greeks.live/area/contingent-liability/), [Regulatory Capital](https://options.greeks.live/area/regulatory-capital/), [Financial Accounting Standards Board](https://options.greeks.live/area/financial-accounting-standards-board/), [Risk Management Framework](https://options.greeks.live/area/risk-management-framework/), [Crypto Custody](https://options.greeks.live/area/crypto-custody/), [Securities and Exchange Commission](https://options.greeks.live/area/securities-and-exchange-commission/)	

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### [How Do Internal Capital Models Optimize Derivatives Block Trade Pricing for Institutions?](https://options.greeks.live/question/how-do-internal-capital-models-optimize-derivatives-block-trade-pricing-for-institutions/)
![A translucent blue algorithmic execution module intersects beige cylindrical conduits, exposing precision market microstructure components. This institutional-grade system for digital asset derivatives enables high-fidelity execution of block trades and private quotation via an advanced RFQ protocol, ensuring optimal capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-core-execution-architecture-intelligence-layer.jpg)

Capital models dynamically price block trades, optimizing capital efficiency and mitigating risk for institutions.

- 
### [Senate Democrats Call for Bipartisan Crypto Regulation Framework Authorship](https://options.greeks.live/news/senate-democrats-call-for-bipartisan-crypto-regulation-framework-authorship/)
![Abstract layers visualize institutional digital asset derivatives market microstructure. Teal dome signifies optimal price discovery, high-fidelity execution. Dark rings represent dynamic RFQ protocols and multi-leg spread execution. Robust cream layer underscores prime brokerage liquidity and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/08/high-fidelity-digital-asset-derivatives-rfq-execution-protocol-layers-and-market-microstructure-optimization.jpg)

A cohort of Senate Democrats advocates for a collaborative, bipartisan authorship process for foundational crypto market structure legislation.

- 
### [How Do Regulatory Frameworks Impact Block Trade Disclosure Requirements?](https://options.greeks.live/question/how-do-regulatory-frameworks-impact-block-trade-disclosure-requirements/)
![A metallic rod, symbolizing a high-fidelity execution pipeline, traverses transparent elements representing atomic settlement nodes and real-time price discovery. It rests upon distinct institutional liquidity pools, reflecting optimized RFQ protocols for crypto derivatives trading across a complex volatility surface within Prime RFQ market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-trade-execution-pipeline-optimizing-rfq-protocols-for-best-execution-and-capital-efficiency.jpg)

Regulatory frameworks mandate block trade disclosure, balancing market transparency with institutional execution discretion to prevent information leakage.

- 
### [What Are the Regulatory Implications of Undetected Block Trade Execution Anomalies in Digital Asset Markets?](https://options.greeks.live/question/what-are-the-regulatory-implications-of-undetected-block-trade-execution-anomalies-in-digital-asset-markets/)
![Central metallic hub connects beige conduits, representing an institutional RFQ engine for digital asset derivatives. It facilitates multi-leg spread execution, ensuring atomic settlement, optimal price discovery, and high-fidelity execution within a Prime RFQ for capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-derivatives-rfq-protocol-execution-hub.jpg)

Proactive anomaly detection safeguards market integrity and optimizes institutional execution in digital assets.

- 
### [Arthur Hayes Predicts Bitcoin Reaches $3.4 Million by 2028](https://options.greeks.live/news/arthur-hayes-predicts-bitcoin-reaches-3-4-million-by-2028/)
![A polished metallic needle, crowned with a faceted blue gem, precisely inserted into the central spindle of a reflective digital storage platter. This visually represents the high-fidelity execution of institutional digital asset derivatives via RFQ protocols, enabling atomic settlement and liquidity aggregation through a sophisticated Prime RFQ intelligence layer for optimal price discovery and alpha generation.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-optimization-for-high-fidelity-execution-and-liquidity-aggregation-via-prime-os-intelligence-layer.jpg)

This forecast underscores the systemic impact of macroeconomic policy on digital asset valuations, offering a strategic framework for institutional portfolio optimization.

- 
### [When Do Multi-Leg Crypto Options Strategies Necessitate Atomic Execution via RFQ Systems?](https://options.greeks.live/question/when-do-multi-leg-crypto-options-strategies-necessitate-atomic-execution-via-rfq-systems/)
![Transparent conduits and metallic components abstractly depict institutional digital asset derivatives trading. Symbolizing cross-protocol RFQ execution, multi-leg spreads, and high-fidelity atomic settlement across aggregated liquidity pools, it reflects prime brokerage infrastructure.](https://options.greeks.live/wp-content/uploads/2025/07/cross-protocol-rfq-execution-digital-asset-derivatives-microstructure-system.jpg)

Atomic RFQ execution for multi-leg crypto options is an operational imperative for risk mitigation and capital efficiency.

- 
### [How Does Asset Segregation in Crypto Custody Protect against Insolvency Risk?](https://options.greeks.live/question/how-does-asset-segregation-in-crypto-custody-protect-against-insolvency-risk/)
![The image depicts two intersecting structural beams, symbolizing a robust Prime RFQ framework for institutional digital asset derivatives. These elements represent interconnected liquidity pools and execution pathways, crucial for high-fidelity execution and atomic settlement within market microstructure. The intersection highlights cross-market price discovery and multi-leg spread capabilities, underpinned by algorithmic trading protocols.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-cross-market-execution-architecture-for-digital-assets.jpg)

Asset segregation in crypto custody protects against insolvency by legally and technologically isolating client assets from the custodian's estate.

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---

**Original URL:** https://options.greeks.live/question/how-does-sab-122-change-the-competitive-landscape-for-crypto-custodians/
