Author: Yueqi Yang
Translated by: Block unicorn
Some major U.S. banks are aggressively entering the cryptocurrency services market for large funds, investors and traders, taking advantage of the rapid relaxation of regulatory policies under the leadership of President Donald Trump to launch digital asset versions of their long-dominated businesses. Currently, most of the moves involve custody services, which represent investors' custody of cryptocurrencies. A senior executive at one of the world's largest stock and bond custodian banks, State Street Bank, said the bank plans to launch digital asset custody services next year. Meanwhile, State Street Bank's top competitor, Bank of New York Mellon, has already launched a small-scale custody business for Bit and ETH, but plans to expand it to more types of tokens. Citigroup, the third largest bank in the U.S. by asset size, is also exploring ways to increase its cryptocurrency custody services, both through in-house development and collaboration with external companies, according to people familiar with the bank. "Citi recognizes that institutional clients' adoption of digital assets is accelerating," a Citi spokesperson said. "We are also working with clients to develop asset tokenization and digital asset custody capabilities." Overall, these plans may represent a reshuffling of power between Wall Street and crypto-focused companies, as banks are expanding key crypto services for large clients. Currently, crypto companies including Coinbase, Anchorage Digital and BitGo dominate the crypto custody space, while Galaxy Digital, FalconX and Hidden Road provide trading services for large investors and traders, effectively making them the Wall Street of the crypto world. Custody is a behind-the-scenes service, but it is crucial as it is a springboard for banks to further penetrate the crypto space in institutional businesses such as trading and lending, which are the lifeblood of Wall Street banks. Traditional asset managers may also be more willing to have their crypto assets custodied by banks rather than crypto companies, so their entry into the crypto space depends on the ability of banks to provide custody services. Until recently, banks have been largely unwilling to directly handle cryptocurrencies, due to regulatory hurdles and the risks of this volatile and relatively new asset class. But in the first week of the Trump administration, the U.S. Securities and Exchange Commission revoked accounting guidance from the Biden era, which effectively made it too costly for banks to hold cryptocurrencies to consider. Federal banking regulators are also overhauling their approach to cryptocurrency regulation, which previously scared banks away from the business. For example, the Federal Deposit Insurance Corporation has warned of the risks of cryptocurrencies to the entire banking system, but is now paving the way for banks to engage in more cryptocurrency activities. The crypto industry is closely watching the plans of U.S. banks, as they could bring capital to the crypto market from large clients such as hedge funds, mutual fund companies, endowments, wealth management firms and financial advisors, who collectively manage trillions of dollars. This could significantly drive the development of the entire crypto market, which is currently valued at around $3.2 trillion, with Bit and ETH accounting for nearly 70% of the market cap. As traditional companies seek to make more crypto investments, they will need places to store their cryptocurrencies and companies to help them trade. For example, Bank of New York Mellon has seen growing interest in cryptocurrencies from endowments, wealth management firms and registered investment advisors who want to have their cryptocurrencies custodied by banks. Caroline Butler, head of digital assets globally at BNY Mellon, said the bank is seeking to add more crypto custody clients in a "measured way." The bank is also exploring providing custody services for asset managers who issue Bit and other crypto ETFs. Currently, Coinbase dominates this business. Most of the fund companies providing popular Bit ETFs, including giants like BlackRock and Franklin Templeton, are using Coinbase to custody billions of dollars worth of cryptocurrencies. Banks can also leverage custody services to enter another hot crypto area: tokenization, or putting assets like bonds on the Blockchain. BNY Mellon is considering using custody services to support tokenized assets like money market funds. "It provides the impetus for all the other custody-related services," Butler said. Similarly, State Street aims to provide custody and transfer agent services - services that track asset ownership - for companies that provide tokenized assets to investors. It can also provide a service to help clients manage the process of using tokenized assets as collateral, which will make these Blockchain-based assets more useful for traders and drive adoption. "Our plan is to phase in these services for clients by 2026, starting with custody, subject to regulatory approvals," said Donna Milrod, chief product officer at State Street. Meanwhile, crypto companies are looking for ways to avoid being completely squeezed out of the market by Wall Street. They believe that many banks will at least initially want to partner with crypto companies to build infrastructure or outsource services. Coinbase, the largest crypto exchange in the U.S., wrote to U.S. banking regulators earlier this month urging them to allow banks to launch crypto custody and trading services by outsourcing parts of these businesses to crypto companies. Brett Tejpaul, head of Coinbase Institutional, said he is holding intensive two-day meetings this week with 10 U.S. banks. However, the product launches of many large banks will not be immediate. For example, State Street still needs to get approval from the Federal Reserve to launch its digital asset custody services in the U.S., Milrod said.
