October 26, 2024

Is BNY Mellon Joining the Fray as a Digital Asset Custodian?

The Bank of New York Mellon Corporation, America’s oldest bank, has cleared a major hurdle as it has shown interest in entering the digital asset custody market for spot Bitcoin and Ethereum ETFs. In the last week of September, the bank shared that it had presented a plan to custody those two assets to the SEC’s Office of the Chief Accountant in a way that would protect customer funds in the event of bank insolvency.

BNY Mellon was provided with a “non-objection” to the plan, a regulatory term that gives BNY Mellon comfort that its proposed structure won’t breach the SEC’s requirement that banks reflect the value of the digital assets they custody on their balance sheet.

In effect, the SEC ruling exempted BNY Mellon from the controversial Staff Accounting Bulletin (SAB) No. 121, which was introduced in 2022. SAB No. 121 requires companies holding digital assets for clients to record them as liabilities. This rule has come under heavy scrutiny and is widely criticized by those within the digital asset space. Although it has sparked debate, the SEC has largely upheld the guidance provided by SAB No. 121. This makes the SEC’s non-objection decision for BNY Mellon extremely significant, as it potentially opens the door to allowing other financial institutions similar exemptions.

The structure that BNY Mellon is using to offer custody services for digital assets could also be utilized beyond just Bitcoin and Ether ETFs according to SEC Commission Chair Gary Gensler. Gensler shared, “Though the actual consultation related to two crypto assets, the structure itself was not dependent on what the crypto was, it didn’t matter what the crypto was.”

This news comes only weeks after ARK 21Shares – the fourth largest spot Bitcoin ETF – announced plans to diversify their roster of custodians.

According to estimates from Bloomberg, the digital asset custody market is currently worth roughly $300 million, and it is growing at 30% annually. This–along with the fact that custody providers often earn markedly higher fees compared to traditional asset custody–makes the sector very attractive to new players.

What This May Signal

This development comes on the heels of President Biden vetoing H.J.Res. 109, a congressional resolution that specifically looked to overturn the SEC’s SAB No. 121.

Lack of regulatory clarity has the potential to keep both retail and institutional investors alike on the sidelines. The more the SEC is supportive of broader custody solutions provided by traditional banks, the more legitimate the space becomes to those that may be wary.

Increased institutional interest in the digital asset space is significant because it may lead to competition between crypto-native firms and traditional financial institutions. This competition has the potential to reshape the landscape of digital asset custody.

Finally, this move–along with those similar to ARK 21Shares’ recent change–could further cut into the dominance of Coinbase (currently the leading custodian for most U.S. spot bitcoin ETFs) in the space.

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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.

Crossover Capital may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Crossover Capital will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.

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