Bank of New York Mellon (BNY) is moving forward with plans to offer custody services for Bitcoin and Ethereum held by its exchange-traded product (ETP) clients.
The move comes after a regulatory review allowed the bank to avoid treating these digital assets as balance sheet liabilities.
The review conducted by the Office of the Chief Accountant at the Securities and Exchange Commission (SEC) did not dispute BNY’s conclusion that crypto asset custody for regulated ETP clients should not appear on its balance sheet. BNY announced the development in a statement to Bloomberg News today.
The decision relates to the SEC’s Staff Accounting Bulletin (SAB) 121, a rule that requires financial institutions to recognize crypto-related risks on their balance sheets. Banks argue that the rule prevents them from entering the potentially lucrative crypto custody business. While the SEC’s review supports BNY’s approach for its specific use case, the bank explained that the decision does not fully resolve the broader challenges posed by SAB 121.
“The failure to appeal does not resolve the issue that SAB 121 effectively restricts the custody of digital assets at banks,” BNY said. The bank plans to continue working with the SEC’s Office of the Chief Accountant on additional use cases as appropriate.
Crypto custody, particularly for ETPs, has emerged as a sought-after service due to the high demand for security against attacks and breaches that plague the digital asset industry. Providers can charge fees that are up to 10 times higher for crypto custody compared to traditional assets due to the added complexity. The crypto custody market is estimated to be worth $300 million and is growing at a rate of approximately 30% per year.
BNY initially said it was ready to offer digital asset custody services in 2022, but SAB 121 has created challenges. President Joe Biden vetoed Congress’ attempt to repeal the rule earlier this year. However, the SEC’s recent no-objection rulings for some financial institutions, including BNY, point to a possible path forward for banks looking to expand into the space.
BNY currently supports 80% of SEC-approved Bitcoin and Ethereum ETPs through its fund services, positioning the bank to offer an end-to-end solution for clients as crypto custody services launch at scale. The launch of U.S. spot-Bitcoin exchange-traded funds (ETFs) earlier this year, including products from BlackRock and Fidelity, further highlights the opportunities in this sector. Bitcoin ETFs currently manage more than $58 billion in assets, while Ethereum ETFs have more than $7 billion in assets.
Despite regulatory challenges, BNY is seeing strong demand for crypto custody services that could help it compete with market leaders like Coinbase. “There is strong demand in the market for bank-qualified custodians for digital assets,” BNY said.
Digital asset regulation has become a hot political topic in the United States, with crypto firms challenging SEC Chairman Gary Gensler’s strict approach to enforcement. Gensler is expected to testify before the House Financial Services Committee today as the debate over crypto oversight intensifies ahead of the 2024 elections.
*This is not investment advice.
