TradFi giant BNY Mellon secures regulatory exemption for crypto ETF custody services

The development positions BNY Mellon to challenge Coinbase's current dominance in crypto asset management.

Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.

BNY Mellon is taking significant steps toward entering the crypto custody market, particularly for Bitcoin and Ethereum exchange-traded funds (ETFs), after securing an exemption from the SEC, Bloomberg News reported on Sept. 24.

According to the report, BNY Mellon received an exemption from the SEC’s Staff Accounting Bulletin 121 (SAB 121) during a review by the Office of the Chief Accountant. This exemption allows the bank to classify customer crypto holdings differently, meaning they do not need to treat these assets as corporate liabilities.

This operational shift could empower more traditional banks to offer crypto custody services, a practice that has largely remained inaccessible to them until now. The development also positions BNY Mellon to challenge Coinbase’s current dominance in crypto asset management and builds on the firm’s crypto custody ambitions.

Disruption

The move to provide custodial services for spot Bitcoin and Ether ETFs could significantly disrupt the current market landscape, where Coinbase oversees most of Wall Street’s crypto ETFs, including those for major asset managers like BlackRock, which manages around $10 trillion in assets.

Currently, Coinbase’s role has positioned it as a leader in the custody of digital assets for these funds, but BNY Mellon’s entry could increase competition and provide clients with more options.

BNY Mellon has expressed a strong interest in the crypto custody sector since early 2023. In January of that year, CEO Robin Vince highlighted digital assets as part of the firm’s long-term strategic vision during an earnings call, noting the growing demand for digital asset services among institutional clients.

Analysts estimate the crypto custody market is expanding at approximately 30% annually and is currently valued at $300 million. If this growth trajectory continues, the market could surpass $1 billion by 2032, with an annual increase of around $90 million.

Regulatory hurdles

Despite the promising outlook, regulatory challenges remain a significant concern for BNY Mellon as it seeks to establish itself in the crypto custody space.

Lawmakers, including Congressman Patrick McHenry and Senator Cynthia Lummis, have expressed concerns about the transparency of interactions between SEC staff and private companies.

In a bicameral letter addressed to the SEC and other regulators, they cited private meetings that allegedly discussed SAB 121 exemptions. It is unclear whether BNY Mellon’s exemption was part of these discussions, raising questions about the regulatory landscape that will govern the bank’s activities in the crypto market.

BNY Mellon’s success will largely depend on its ability to navigate the complex regulatory environment while capitalizing on the growing demand for digital asset services among institutional investors.

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