BNY Mellon Advances Towards Crypto Custody for ETFs Following SEC Review

The Bank of New York Mellon (BNY) is on track to offer custody services for Bitcoin and Ether on behalf of its exchange-traded fund (ETF) clients. This progress follows a review by the United States Securities and Exchange Commission (SEC), which concluded that BNY would not need to comply with certain controversial accounting practices.

Recent insights revealed that the SEC’s Office of the Chief Accountant determined BNY is exempt from the requirements set out in the Staff Accounting Bulletin (SAB) 121, as reported by Bloomberg. This bulletin previously mandated that financial institutions safeguarding client crypto assets classify these assets as liabilities in their accounting records.

SEC Eases Regulatory Requirements

In its statement, the SEC suggested that other financial entities may also benefit from similar accommodations. A spokesperson noted to Bloomberg:

“Certain broker-dealers and custody banks have sufficiently demonstrated to SEC staff that their fact patterns are different from those described in SAB 121.”

The spokesperson further indicated that if these institutions can ensure that their clients receive equivalent protections for their crypto assets as they do with traditional custodial arrangements, they may be treated similarly from a balance sheet perspective.

However, BNY will need additional endorsements from other regulatory bodies apart from the SEC before launching its custody services. The bank stated:

“BNY has engaged, and will continue to engage, its banking regulators to offer custody services to crypto ETP clients at scale.”

Controversy Surrounding SAB 121

The introduction of SAB 121 caught many in the crypto space off guard. Notably, Coinbase’s Q1 2022 financial disclosures sparked unwarranted fears about the company’s viability after they adapted their reporting to comply with this new guideline.

In June 2022, several politicians voiced concerns over the SEC’s approach, branding it “regulation disguised as staff guidance.” They subsequently reached out to SEC Chair Gary Gensler to express their grievances.

Following this, the Government Accountability Office reviewed the bulletin at the request of Senator Cynthia Lummis, concluding in October 2023 that SAB 121 fell under the Congressional Review Act, which mandates that agency rules be presented to Congress with potential for disapproval.

A coalition representing various financial organizations, including the Bank Policy Institute and the American Bankers Association, submitted a letter to Gensler in February, advocating for exemptions for traditional assets recorded on blockchains from SAB 121 regulations.

Despite the mounting pressure, the SEC maintained its stance on the guidance. In May, legislation aimed at overturning the regulations was passed, but it was subsequently vetoed by President Joe Biden the following month.