US Crypto Custody Landscape Reaches Turning Point
Who's breaking the rules?
A key development has taken place in the US that suggests the SEC is softening its stance toward institutional cryptoasset custody, and crucially, pave the way for greater institutional adoption of cryptoassets.
BNY Mellon, the oldest bank in the US, confirmed it has received approval from the SEC to provide cryptoasset custody for asset managers issuing Bitcoin and Ether-based exchange-traded funds, without having to list them as balance sheet liabilities. SEC chairman Gary Gensler said that the SEC reviewed BNY Mellon’s custody framework and found ‘no issues,’ allowing the bank to broaden its cryptoasset services by granting it a special designation called ‘non-objective status.’ This was after BNY Mellon demonstrated that holding cryptoassets for its ETF clients was not in any way a financial ‘burden’ or risk to them.
This removes one of the main roadblock to institutional adoption of cryptoassets in the US this decade, which has been the Staff Accounting Bulletin 121 (SAB 121) rule. Issued by the Securities and Exchange Commission (SEC) in 2022, SAB 121 requires banks and non-banks that perform custodial services to place digital assets (which includes cryptoassets) on their balance sheets. Custodians have to hold a commensurate asset on-balance sheet “at initial recognition” and at the same time the digital asset is custodied, despite the assets not belonging to the custodian. In contrast, the conventional method of securities accounting keeps custodied assets off a financial institution’s balance sheet.
On top of the SAB 121 requirements, the transition to the Basel III requirements from July 2025 will make a growing balance sheet even more costly for banks, with less capital available for lending activities. Ultimately, if a bank were to custody cryptoassets according to the SEC’s rules, the on-balance sheet rules would affect their other regulatory obligations such as their capital and liquidity requirements. As such banks and non-banks in the US are deterred from keeping cryptoassets in custody.
While this issue has led to backlash from industry participants this year, with pressure from The House Financial Services Committee to overturn the SEC guidelines, US president Joe Biden vetoed the resolution to overturn the SEC’s cryptoasset custody rules, casting doubt over the future of institutional cryptoasset custody in the US.
The move from the SEC to relax the SAB 121 rule for BNY Mellon could pave the way for other traditional banks and custodians to follow suit and offer crypto custody frameworks, while operating within the confines of the law. It could also give custodian banks the opportunity to provide more competitive fees compared to native cryptoasset custody providers such as Coinbase, leading to greater innovation and more standardisation in the institutional crypto custody sector.
In fact, the SEC stated it has granted similar exemptions to other select financial institutions in recent months, including broker-dealers and custodian banks.
However, the real significance in the move from the SEC to approve BNY Mellon’s custody of cryptoassets is perhaps indicative of a changing stance toward cryptoassets and could help foster greater confidence towards cryptoassets at an institutional level.
To be clear, dеspitе rеcеiving SEC аpprovаl for custody, BNY still nееds to gаin thе grееn light from othеr rеgulаtors bеforе еxpаnding its sеrvicеs. At the same time, this development is specific only to BNY Mellon’s use of ETFs, and does not fully аddrеss thе widеr limitаtions of SAB 121 rеgаrding bаnks’ аbility to hold cryptoassets.
Nevertheless, the SEC’s approval is a step in the right direction for institutional crypto custody, and could be a key turning point for the wider crypto industry as it continues its integration into the traditional finance world.