BNY Mellon Advances Crypto Custody Services Post SEC Review

BNY Mellon Expands Crypto Custody Services Amid SEC Review

The Bank of New York Mellon (BNY) is making headlines in the cryptocurrency market with its plans to offer custody services specifically for Bitcoin and Ether exchange-traded fund (ETF) clients. This initiative comes in the wake of a favorable ruling by the United States Securities and Exchange Commission (SEC), allowing BNY Mellon to bypass compliance with the agency's Staff Accounting Bulletin (SAB) 121.

Understanding SAB 121

SAB 121, established in April 2022, mandates that companies holding client assets in cryptocurrencies must categorize these assets as liabilities on their financial statements. This rule has posed a significant hurdle for many in the U.S. crypto sphere, as it complicates the accounting practices of companies dealing in digital assets.

However, the SEC's Office of the Chief Accountant has determined that BNY Mellon’s operational circumstances are distinct, thereby permitting the bank to circumvent this requirement. This critical decision has led to speculation that other financial institutions might similarly escape these restrictions.

Potential Impact on Financial Institutions

A spokesperson from the SEC highlighted the possibility that certain broker-dealers and custody banks could also receive exemptions from SAB 121. The key factor in these determinations is whether customers receive equivalent protections for their crypto assets as they would have in traditional custody setups. This implies that if customers are adequately protected, their assets can be treated off-balance-sheet, streamlining the handling of cryptocurrencies.

Next Steps for BNY Mellon

Even with the SEC's favorable ruling, BNY Mellon must still seek approval from additional regulators before launching its crypto custody services. The bank has actively been in discussions with its banking regulators to implement these services for crypto ETP clients on a larger scale.

SAB 121: A Contentious Regulation

SAB 121 has been a topic of contention since its inception, particularly highlighted during Coinbase’s Q1 2022 financial disclosures, which drew negative speculation regarding the company's financial health due to the new accounting rules. In response to these issues, politicians, including pro-crypto advocates, have expressed criticism. In June 2022, a group of lawmakers reached out to SEC Chair Gary Gensler, demanding a reevaluation of the guideline, claiming it was more about regulatory control than actual guidance.

Legislative Developments and Future Outlook

The Government Accountability Office (GAO) reviewed SAB 121 after a request from Senator Cynthia Lummis and found that the guideline is subject to the Congressional Review Act, which necessitates submission of such rules to Congress for possible disapproval. Despite calls from various sectors of the financial industry and a coalition of crypto advocates for the SEC to amend or repeal the SAB, the agency has chosen to uphold its guidance.

Interestingly, a legislative attempt to overturn SAB 121 was made in May; however, President Joe Biden vetoed the proposal the following month, affirming the SEC's regulations.

Conclusion

As BNY Mellon moves forward with its innovative approach to cryptocurrency custody, the evolving landscape of regulations continues to shape the financial industry's relationship with digital assets. Stakeholders will be keenly observing how these developments unfold and their implications for the future of cryptocurrency in the U.S.