Crypto Custody Divide Deepens as SEC Approves BNY Exemption

BNY Mellon, the largest custodian bank in the United States, has become the first institution to receive an exemption from the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin (SAB) 121, a regulatory hurdle for crypto custody services. This exemption, revealed during a public hearing in Wyoming's Select Committee on Blockchain, Financial Technology, and Digital Innovation Technology, allows the bank to offer institutional custody for digital assets without the requirement to record cryptocurrencies as liabilities on its balance sheet. The move marks a significant step in BNY Mellon's broader strategy to expand its digital asset offerings, aligning with growing demand for secure and regulated custody solutions in the institutional market.

SAB 121, issued in 2019, mandates that custodians holding crypto assets for clients must treat these assets as liabilities, a rule criticized for imposing excessive accounting burdens on financial institutions. The SEC's exemption for BNY Mellon applies under specific conditions, including collaboration with state regulators to ensure customer assets can be returned in the event of bankruptcy and the implementation of robust risk controls for institutional clients. SEC Chief Accountant Paul Munter confirmed the agency's willingness to grant exemptions to banks and brokerages engaging in blockchain-based custody of traditional financial assets, though he did not name BNY explicitly. The exemption effectively paves the way for traditional banks to enter the crypto custody market, which has previously been dominated by specialized firms like Custodia and Kraken.

The Federal Reserve and New York Department of Financial Services (NYDFS) also played roles in facilitating BNY Mellon's entry into crypto custody. According to testimony from Chris Land, general counsel for U.S. Senator Cynthia Lummis, the Federal Reserve's non-objection to BNY's activities was likely required under existing regulatory frameworks. While the Fed has not explicitly mandated prior approval for crypto custody, BNY Mellon's exemption suggests that state-chartered banks may need to navigate similar federal and state regulatory pathways as national banks. The bank, which operates under NYDFS and Federal Reserve supervision, declined to comment directly on the exemption.

Industry reactions to BNY Mellon's exemption highlight both optimism and concerns about regulatory fairness. Michael Novogratz, CEO of Galaxy Digital, noted the exemption could encourage other traditional banks to enter the crypto custody space, fostering broader institutional adoption. However, Wyoming Select Committee Chair Cyrus Western expressed frustration over what he described as a "double standard," arguing that smaller crypto-native firms adhering to strict state regulations face disadvantages compared to larger banks receiving federal exemptions. Custodia and Kraken, which hold Wyoming's Special Purpose Depository Insurance (SPDI) charters, have struggled to gain similar regulatory clarity, raising questions about equitable access to the market.

BNY Mellon's exemption underscores the SEC's evolving approach to crypto regulation. Under Chairman Paul Atkins, the agency has prioritized innovation-friendly policies, including plans to introduce an "innovation exemption" by year-end 2025 to reduce regulatory barriers for crypto firms. While SAB 121 exemptions are limited to specific conditions, they reflect a broader shift toward balancing investor protection with market growth. The agency's recent actions, such as allowing exchanges to list spot commodity ETPs without individual SEC reviews, indicate a willingness to streamline processes for digital asset products.

The implications for the crypto market are significant. By enabling traditional banks to offer custody services, the exemption could accelerate institutional adoption of Bitcoin and other digital assets, enhancing market legitimacy. However, the regulatory landscape remains fragmented, with state-level rules and federal guidelines creating uncertainty. For instance, BNY Mellon may argue that federal preemption applies to New York's BitLicense requirements, potentially sidestepping state-specific licensing hurdles. This dynamic highlights the need for cohesive federal legislation to harmonize oversight and ensure a level playing field for all market participants.