Bank of New York Mellon Corp. is moving closer to rolling out custody services for the Bitcoin and Ether held by exchange-traded product clients after a review enabled the company to avoid treating the assets as a balance-sheet liability.

The review, conducted earlier this year by the Office of the Chief Accountant at the Securities and Exchange Commission, didn’t object to BNY’s determination that the safeguarding of cryptoassets for its regulated exchange-traded product clients shouldn’t be recognized on BNY’s balance sheet, the bank said in a statement to Bloomberg News on Tuesday.

The SEC’s SAB 121 rule imposes the balance sheet requirement to provide clarity on crypto-related risks but banks argue it locks them out of custodying digital assets, a potentially lucrative business. BNY said the accountancy office’s decision is specific to the financial institution’s ETP use case. 

As a result, the no-objection “does not 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.”

In addition to the SEC, banks seeking to engage in crypto custody services would require approvals from their other regulators.

“BNY has engaged, and will continue to engage, its banking regulators to offer custody services to crypto ETP clients at scale,” BNY told Bloomberg in an emailed statement.

Higher Fees

Providers can charge as much as 10 times more for safekeeping crypto compared with traditional assets, given the heightened need for security against hacks that have cost the digital-asset industry billions of dollars. By one estimate, the crypto custody market is worth approximately $300 million now and is growing by about 30% yearly.

BNY announced the technical readiness of its digital-asset custody infrastructure in 2022 but SAB 121 made the provision of the service challenging. President Joe Biden vetoed an effort by Congress to overturn the SAB 121 earlier in 2024.

The Office of the Chief Accountant provided no-objections to some other financial institutions in recent months. “Certain broker dealers and custody banks have sufficiently demonstrated to SEC staff that their fact patterns are different from those described in SAB 121,” an SEC spokesperson said.

Those companies still have to ensure customers maintain ownership of assets even in the case of a resolution or bankruptcy, the SEC said. “Under those circumstances, as long as their customers receive the same protection for the safeguarding of crypto assets as they do in custody arrangements, their balance sheet treatment is also the same as custody arrangements,” the SEC added.

‘Strong Demand’

BNY is a giant in traditional markets, overseeing more than $50 trillion in assets as of the end of June. “There is strong demand in the market for bank qualified custodians for digital assets,” BNY said.

BNY already supports 80% of SEC-approved Bitcoin and Ether exchange-traded products through its fund services business, according to the company. Offering crypto custody would enable clients to receive an end-to-end solution.

The launch of US spot-Bitcoin exchange-traded funds earlier this year underlined the opportunities in crypto custody. The dozen products from the likes of BlackRock Inc. and Fidelity Investments have amassed about $58 billion in assets. Counterparts for Ether have accumulated more than $7 billion. 

BNY’s planned push into crypto ETP custody heralds more competition for the current major US ETF custodians, such as market-leader Coinbase Global Inc. 

Digital-asset regulation has become an election issue in the US, as crypto firms push back against SEC Chair Gary Gensler’s claims of willful noncompliance. Republican nominee Donald Trump has openly courted the industry, while Democrat candidate Vice President Kamala Harris has vowed to help grow investment in artificial intelligence and crypto under appropriate guardrails.

Gensler is due before the House Financial Services Committee on Tuesday for a hearing about the oversight of the securities regulator.