This article was originally published in FIN, the best fintech newsletter; subscribe here.
The fanfare could have been louder. This week, the oldest bank in the United States, Bank of New York Mellon, announced that it has begun holding cryptocurrency investments for some of its customers. The Wall Street Journal reported that New York State’s financial regulator has granted BNY Mellon permission to hold digital assets for its clients (although the bank does not yet appear on the Department of Financial Services’ website list of entities that have been granted state “BitLicenses.”)
The development was long awaited. Back in February 2021, BNY Mellon announced that it was creating a digital assets group with the goal of doing exactly what it is doing now. Since the initial announcement, Goldman Sachs relaunched its crypto trading desk, Citi created a digital assets group, and other major banks have found their way to grab a piece of crypto. But BNY Mellon is the first traditional bank to take care of customers’ cryptocurrency (Bitcoin and Ether only for now).
In a way, BNY Mellon is very late to the crypto party; obviously, millions of consumers have already entrusted custody of Bitcoin and other cryptocurrencies to startup sites like Coinbase and Robinhood. Omid Malekan, an author and consultant who teaches cryptocurrency at Columbia Business School, told FIN that the bank’s entry into crypto in late 2022 is “a pretty damning reflection of the industry.”
And yet a 238-year-old financial institution like BNY Mellon is a very different creature from, say, Robinhood.
It is one of eight US-based banks deemed by regulators to be “globally systemically important” (the others being JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Wells Fargo, Morgan Stanley and State Street). These giants have higher capital requirements and face greater regulatory scrutiny than smaller, newer banks and financial institutions. Their larger clients are institutional investors (such as pension funds) who are often severely limited in the types of risks they can take; many are prohibited from taking their own custody of cryptocurrencies, which individuals can of course do.
That’s precisely why BNY Mellon’s move into digital assets is such a big deal. There is no doubt that crypto investments are in high demand among institutional players, despite a year’s worth of falling prices and disasters such as the $40 billion Terra Luna explosion; if anything, bad publicity about crypto hacks and scams makes BNY Mellon more attractive to big investors. With its announcement, BNY Mellon also issued a survey of 271 heavy hitters (pension funds, sovereign wealth funds, asset managers, hedge funds) and about three-quarters of them said they want to trade digital assets with a trusted institution next to their more. traditional assets. It seems inevitable that the other major banks will soon offer similar services; “It’s just a matter of time,” says Malekan.
However, not everyone is happy. It’s hard to avoid at least a little sympathy for crypto pioneer companies that are now backed by a bank with $43 trillion in assets under custody. Wyoming-based digital asset bank Custodia seems particularly bent out of shape. FIN readers will recall that back in June there was a charged battle over whether a Colorado-based, politically connected bank called the Reserve Trust deserved the “master account” the Kansas City Federal Reserve had given it (a master account gives a bank direct access to the Fed’s payment system ). First the Fed denied the Reserve Trust’s application, then it approved, then under congressional fire it apparently revoked the license (the Reserve Trust no longer appears to have a working website).
Those revelations prompted Custodia to sue the Federal Reserve Bank and the Kansas City Fed, claiming the Fed’s “patentably unlawful delay” in considering the application has harmed its business. The Fed has fairly broad discretion in deciding whether to grant a master account to institutions that don’t automatically have them, but there is no apparent rationale for refusing to act at all in what is now two years since Custodia first applied. The lawsuit points to a federal statute that clearly sets a one-year deadline, and accuses the Fed of “secretive government” that benefits the entrenched financial institutions represented on the Fed’s board. Several Republican lawmakers and the state of Wyoming have filed amicus briefs supporting Custodia. The Fed has not commented on the lawsuit, but has argued in court documents that Custodia’s systems “potentially have implications for the stability of our nation’s payment system.”
That argument is hard to sustain in the wake of this week’s news; even if a small bank like Custodia went bankrupt it would not disrupt the US banking system. Perhaps unsurprisingly, the news that BNY Mellon is now in the crypto custody business prompted Custodia to complain again. The company’s argument is: If crypto custody and trading is safe enough for BNY Mellon, why not for Custodia? The Fed “has one rule for innovators like Custodia Bank, and another for the nation’s oldest bank,” a Custodia representative told CoinDesk, adding a petition to its existing case,
BNY Mellon did not respond to a request for comment on the Custodia action.
Eventually, the Fed will establish a more transparent system for assigning master accounts, but in the meantime, the feeling that government regulators are playing favorites will not go away.
