BNY Mellon becomes the first bank to receive SEC exemption SAB 121: Custody of cryptocurrencies does not need to be included in financial statements

As the US financial industry gradually enters the field of cryptocurrency custody, one of the world's largest custody banks, BNY Mellon in New York, has been confirmed as the first bank to receive an exemption from SEC's SAB 121 provision. This move is seen as a significant breakthrough for banks entering the cryptocurrency custody business, attracting widespread attention in the financial sector.

The US House of Representatives failed to overturn Biden's veto of SAB 121, while the SEC has long opened a back door for banks?

BNY Receives SEC Exemption, Accelerating Development of Crypto Custody Business

According to information disclosed at a public hearing held in Wyoming on Monday, 9/16, BNY has obtained a special exemption from the SEC to not comply with the SAB 121 accounting guidance rules for institutional crypto custody businesses. The rule requires entities choosing to engage in cryptocurrency custody to include crypto assets on their balance sheet and establish corresponding liabilities, a process criticized by the industry as overly cumbersome. This exemption from the SEC holds significant implications for other banks looking to enter the crypto custody space.

SEC Confirms Bank Exemption from SAB 121 Requirements

According to SEC Chief Accountant Paul Munter's speech, the SEC has granted partial exemptions from SAB 121 requirements to certain entities that meet the criteria, including banks, broker-dealers, and companies using blockchain technology for traditional financial asset transfers. He mentioned that a bank and several broker-dealers have received exemptions, without specifying the bank names. This exemption also involves handling the return of crypto assets to customers in the event of bankruptcy.

Fed Non-Objection to BNY Custody of Crypto Assets

BNY, based in New York, is regulated by the NYDFS and the Federal Reserve. According to testimony provided at the Wyoming hearing, BNY's crypto custody activities have received a "non-objection" from the Federal Reserve. However, the necessity of such letters from the Fed remains uncertain, as the two Federal Reserve regulatory letters do not explicitly require clear approval before engaging in crypto custody business.

Does BNY Need a BitLicense from New York?

During the Wyoming hearing, the discussion also focused on whether BNY needs to apply for New York's BitLicense. It is speculated that BNY may rely on the priority of federal law to argue that it is not subject to the constraints of the BitLicense. This means that BNY could engage in crypto custody business without being subject to state-level regulation.

Favoritism towards Banks? Unfair Regulatory Environment

Cyrus Western, Chairman of the Wyoming Blockchain Committee, stated after the hearing that the exemption granted to BNY by the SEC reflects an exacerbation of double standards.

Western mentioned that compliant institutions like Custodia and Kraken face significant competitive disadvantages due to a lack of Master Account qualification from the Federal Reserve. He believes that the exemption granted to BNY marginalizes these crypto companies in competition and raises questions about fairness.

What is the Current State of Digital Asset Custody in the United States?

With an increasing number of institutional investors entering the digital asset market, the demand for secure custody continues to rise. These investors require custody services that meet traditional financial standards, such as offline storage, multi-signature technology, and asset insurance.

Many traditional financial institutions, such as Fidelity, J.P. Morgan, and State Street, have entered the digital asset custody market, providing custody solutions for institutions and high-net-worth individuals. The participation of these large financial institutions enhances confidence and legitimacy in the digital asset custody market.

In addition to traditional financial institutions, companies specializing in digital asset custody have also rapidly grown, such as Anchorage, BitGo, and Coinbase Custody. Coinbase is the custodian for all Bitcoin and Ethereum spot ETFs.

For operators in the native crypto industry, SAB 121 is considered unfriendly. If traditional banks can obtain exemptions while competing with them, it may significantly limit the survival space for crypto operators.

Taiwanese Banks Can Also Custody Virtual Assets

In July this year, Financial Supervisory Commission Chairman Thomas Huang stated that allowing the financial industry to enter the virtual asset field would facilitate financial transformation. This includes promoting the tokenization of real-world assets and opening up financial institutions to conduct virtual asset custody business. Banking Bureau Director Chuan Hsiu-yuan pointed out that there are mainly two ways of virtual asset custody:

• Keeping customer private keys in physical safe deposit boxes

• Using algorithms to secure private keys

This will significantly enhance the trustworthiness of virtual asset platforms and open up new business opportunities for the banking industry.

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