BNY Mellon (BK), the oldest bank in the US, is preparing to enter the bitcoin (BTC-USD) and ether crypto-custody market for spot exchange-traded funds (ETF) clients like BlackRock (BLK) and Franklin Templeton.

This move could disrupt the dominance of Coinbase (COIN), the leading digital asset custodian for most US spot bitcoin ETFs. As institutional interest in cryptocurrencies continues to grow, the competition between newer crypto-native firms and traditional finance institutions could reshape the landscape of digital asset custody.

SEC gives 'no-objection' to crypto custody request

BNY Mellon has received a "no-objection" from the US Securities and Exchange Commission (SEC) regarding its request to safeguard digital assets like bitcoin and ether (ETH-USD) without having to list them as balance-sheet liabilities — a decision that could make it easier for the bank to offer these services while adhering to regulatory requirements, according to a report by Bloomberg.

The SEC’s non-objection addresses the challenges posed by the financial regulator's Staff Accounting Bulletin (SAB) 121. Under SAB 121, companies that hold cryptocurrencies on behalf of clients are required to report them as balance sheet liabilities, which many financial institutions view as restrictive.

BNY Mellon is now in a position to offer custody services without this burden, potentially paving the way for other traditional banks to follow suit.

Regulatory approval and challenges

BNY Mellon still has to approach the SEC’s Office of the Chief Accountant (OFA) on a case-by-case basis.

Read more: What are bitcoin ETNs?

Hence, this "does not fully solve the issue of SAB 121 effectively restricting bank custody of digital assets," BNY said, adding that it "will similarly engage with the OCA on additional use cases through the OCA’s ‘facts and circumstances’ process, as appropriate."

BNY Mellon's strategic move into crypto custody

The move positions the bank as a competitive player in the crypto custody market, targeting institutional clients who are seeking secure and compliant ways to invest in digital assets through ETFs.

The bank’s extensive experience in asset custody, combined with its reputation and regulatory compliance, could make it an attractive alternative to existing crypto custodians.

The crypto custody market is currently valued at around $300m (£224m) and is growing at an annual rate of approximately 30%, according to Bloomberg estimates.

The sector is lucrative, as custody providers for digital assets often charge substantially higher fees compared to traditional assets due to the heightened security risks involved.

Read more: Bitcoin price stagnant as analysts anticipate October rally

In January 2023, BNY Mellon CEO Robin Vince described digital assets as the bank’s “longest-term play” during its Q4 2022 earnings call. Through its fund services business, BNY Mellon already supports 80% of SEC-approved bitcoin and ether exchange-traded products, according to Bloomberg.

Coinbase’s dominance and potential challenges

Coinbase remains the dominant custodian in the US spot Bitcoin ETF market, providing digital asset custody services to major players including BlackRock. Its role as a custodian is critical for securely storing the underlying digital assets and ensuring compliance with regulatory standards.

However, BNY Mellon’s foray into the bitcoin and ether custody space could have an impact on the broader financial landscape. Increased competition between traditional banks and crypto-native firms could drive improvements in service quality, regulatory compliance, and security standards, potentially bolstering investor confidence and fostering greater institutional adoption of digital assets.

While crypto-native companies have led innovation in this space, traditional banks like BNY Mellon bring scale, stability, and decades of experience managing institutional capital.

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