SEC Approves BNY Mellon for Crypto Custody Beyond ETFs

Highlights:

• BNY Mellon gains SEC approval for broader crypto custody, enhancing asset security. 
• This move positions the bank to capitalize on the growing crypto custody market. 
• However, criticism arises regarding perceived preferential treatment under regulatory guidelines.

Bank of New York Mellon Corp (BNY Mellon), America’s largest custodian bank, has reportedly been approved by the United States Securities and Exchange Commission (SEC) for crypto custody beyond exchange-traded funds (ETFs). SEC Chair Gary Gensler stated that BNY Mellon’s approach is not limited to specific cryptocurrencies, opening the door to other digital assets.

According to the Bloomberg report, the SEC has apparently approved a ‘non-objection’ to BNY Mellon’s proposed custody model, under which the bank can hold digital assets without violating regulatory guidelines. The current structure that BNY Mellon employs for its crypto custody services already encompasses Bitcoin and Ethereum ETFs. Recently, the bank submitted a proposal to the SEC’s Office of Chief Accountant outlining a plan to safeguard customer funds by holding those two assets in a manner that would protect them in the event of bank insolvency. 

The SEC has since issued a “non-objection” to this proposal from BNY Mellon. Gensler stressed that the “non-objection” is contingent on the structure itself rather than the specific type of crypto asset, enabling other banks to adopt the same model for crypto custody.

Looks like there has been real progress on allowing banks to custody crypto & avoid requirements of SAB 121…

This extends beyond just the custody of btc & eth for spot ETFs.

Seems like big deal.

via BBG pic.twitter.com/YMxIOq7EXR

— Nate Geraci (@NateGeraci) September 26, 2024

BNY Mellon’s Custody Plan Designed to Safeguard Client Assets

Moreover, Gensler noted that BNY’s proposed structure incorporates individual crypto wallets. Each wallet would be linked to a separate bank account and prohibited from being mixed with the bank’s assets. 

According to the SEC Chair, the bank can determine whether to broaden the range of digital asset use cases it is willing to custody. This approval arrives at a moment when numerous crypto traders have faced insolvency challenges with platforms such as Celsius Network, FTX, and Voyager Digital.

Furthermore, Gary Gensler elaborated that other banks and brokers have also explored potential structures for digital asset custody. He praised BNY for conducting the “legwork” to ensure customer assets remain securely owned by their clients. BNY is the largest custodian bank globally, formed in July 2007 through the merger of the Bank of New York and Mellon Financial Corporation. It currently manages over $49 trillion in assets.

The crypto custody market, valued at approximately $300 million and expanding at an annual rate of 30%, presents a significant opportunity for financial institutions. Non-bank providers typically charge much higher fees for digital asset custody than for traditional assets, allowing BNY Mellon to capitalize on this growing demand. The bank can attract clients by offering more secure and regulated solutions.

Criticism Grows Over BNY Mellon’s Exemption from SAB 121

The approval has drawn criticism from crypto industry stakeholders who argue that BNY Mellon received special treatment. Under SAB 121, institutions must report the value of custodial crypto assets on their balance sheets alongside a corresponding liability, a practice that many in the industry find unpopular. However, BNY Mellon has reportedly received an exemption from SAB 121, which has fueled resentment among crypto enthusiasts and other financial institutions.

Furthermore, US SEC Commissioner Hester Peirce and other market participants have expressed concerns about bias, arguing that the SAB 121 no-action relief granted to BNY Mellon does not extend to other institutions. Critics, including Caitlin Long, CEO of Custodian Bank, point out that regulators apply these rules inconsistently, supporting large banks while complicating the process for others.

BUT OF COURSE. While the Fed screams about the systemic risk of digital assets, it lets a *systemically important bank* get into the business. You literally can't make this up. It's how the US system works, folks.🤬 https://t.co/qFBfY3AKBI

— Caitlin Long 🔑⚡️🟠 (@CaitlinLong_) September 24, 2024