BNY Mellon Gets SEC Green Light for Institutional Crypto Custody, Breaking Barriers

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As a seasoned analyst with over two decades of experience in the financial industry, I find this latest development in the institutional crypto custody space intriguing and somewhat perplexing. The exemption granted to BNY Mellon by the SEC from adhering to SAB 121 accounting guidelines for its institutional crypto custody operations is a significant move that could potentially reshape the landscape of the crypto industry.

As a crypto investor, I’m excited about the latest news that the leading custodian bank in the U.S., BNY Mellon, might have secured an exemption from following the SEC’s SAB 121 accounting guidelines for their institutional cryptocurrency custody services. This could be a significant stride for banks entering the digital asset custody space.

On Monday during a federal briefing, it was disclosed by Chris Land, legal advisor to US Senator Cynthia Lummis (R-WY), that BNY Mellon has received approval from the SEC and possibly other regulatory bodies, to offer secure storage solutions for digital assets on an institutional level.

SEC Eases Rules, Banks Can Now Offer Institutional Crypto Custody

According to Land:

BNY aims to deepen its role within the cryptocurrency safekeeping sector. It seems they encountered issues related to Staff Accounting Bulletin (SAB) 121, but the SEC appears to have granted them an exception from SAB 121 to progress.

In an unexpected announcement, the Securities and Exchange Commission’s Chief Accountant, Paul Munter, revealed during a talk that the SEC has allowed certain exceptions under SAB 121. He stated that these exemptions were provided to banks, brokerage firms, and other entities employing blockchain technology for tracking and transferring traditional financial assets. However, he did not reveal the identities of the specific entities involved.

According to SAB 121, cryptocurrency custodial entities must account for their assets on their balance sheet and simultaneously record a liability based on the fair value of the cryptocurrency. Many people, including those in the crypto and banking sectors, find this requirement excessively demanding and have expressed criticism about it.

According to Munter, it was determined by the SEC that SAB 121 regulations do not apply to banks, brokerage firms, and similar institutions utilizing blockchain technology in specific scenarios. In this context, the bank received an exemption under certain stipulations, such as collaboration with a state regulatory body. This arrangement ensures that in the event of bankruptcy, cryptographic assets would be returned to the customers. Additionally, the bank was only authorized to perform institutional custody activities, and was required to implement robust risk management controls for these operations.

In light of the ongoing SAB121 case, I must note that the U.S. Securities and Exchange Commission (SEC) has requested a pause in their lawsuit against Coinbase. Their goal is to seek an extension from the court for additional time to carry out the discovery process. Specifically, they aim to push back the deadline for fact discovery to a date beyond the November election, specifically in February of next year.

BNY Mellon Gets Crypto Custody Green Light, Others to Follow

BNY Mellon, located in New York, comes under the oversight of both the New York Department of Financial Services and the Federal Reserve. As stated by Chris Land, general counsel to U.S. Senator Cynthia Lummis, BNY Mellon might have been exempt from Securities and Exchange Commission’s SAB 121 rules. According to Land, since the Federal Reserve regulates BNY Mellon’s bank holding company, it would have played a part in allowing BNY Mellon to enter the digital asset custody business. However, it is uncertain if a written approval from the Fed was necessary because letters from 2022 and 2023 (SR 22-6 and SR 23-7) do not explicitly state that prior approval is mandatory for crypto custody activities.

It’s worth noting that institutional interest in Bitcoin increased significantly during the second quarter of this year. This trend is evident from market data showing large investors holding more Bitcoin. Notable companies such as Mercado Libre and BNY Mellon, along with other well-known institutions, have recently revealed their involvement in Bitcoin, which has added to the bullish sentiment in the market.

State-chartered banks, including BNY Mellon, should adhere to regulations similar to those governing national banks. This includes the requirement to obtain a non-objection letter. According to the Federal Reserve’s Policy Statement 9-13, state banks must comply with rules applicable to national banks regarding their activities. The Office of Comptroller of the Currency mandates this letter for national banks before they can participate in crypto custody activities.

As a crypto investor, I pondered over Chair Cyrus Western’s query regarding whether Bank of New York (BNY) would need a BitLicense to handle digital assets, given Wyoming’s Select Committee on Blockchain inquiry. In response, Land indicated that federal banking laws might allow BNY to bypass such a license under state law.

As an analyst, I’ve noticed some intriguing speculations stirring around Bank of New York (BNY) regarding its potential exemption from SAB 121, which could pave the way for traditional banks, like BNY, to delve deeper into the crypto realm. Michael Novogratz, Galaxy Digital CEO, has hinted at this possibility, suggesting that such a move might encourage more conventional banks to embrace digital assets. Recently, Robin Vince, BNY’s CEO, shared his insights on how the bank is readying itself for a future where it could play a significant role in the rapidly expanding digital asset space.

Slamming SEC’s ‘Double Standards’ in Crypto Custody Case

After listening to Chris Land’s testimony on Monday, I, as a researcher, find Wyoming Select Committee Chair Cyrus Western expressing his growing concern over perceived inconsistencies in the crypto custody sector. Western highlights the SEC’s apparent exemption of BNY Mellon from SAB 121 as a glaring instance of these discrepancies, describing them as increasingly problematic. From a state standpoint, he finds this situation particularly aggravating due to the worsening nature of these double standards.

Western criticized the preferential treatment, highlighting how firms like Custodia, Kraken, and Bankwyze, which have diligently followed regulations, are being sidelined. “These companies want to be good corporate citizens, create jobs, and pay taxes, yet they’re being ignored, while it seems that BNY is being favored,” he said. He referenced Custodia’s ongoing legal battle with the Federal Reserve over its denied master account, a key competitive disadvantage that has added to the frustration.

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2024-09-20 23:14