BNY Mellon Approved for Crypto Custody by SEC Despite Favoritism Claims

Key Takeaways

• BNY Mellon became one of the first financial institutions to offer crypto custody service beyond digital assets.
• The New York bank got an exemption from the controversial SAB 121 guidelines.
• SAB 121 is one of the agency’s most controversial bulletins, with opposition from 60 lawmakers.

The Bank of New York Mellon (BNY Mellon) has become one of the first financial institutions to get the Securities and Exchange Commission’s (SEC) nod to offer crypto custody services beyond exchange-traded funds (ETFs) .

According to SEC chief Gary Gensler, BNY Mellon can now expand its crypto custody services beyond ETFs. The SEC approval also comes amid accusations of favoritism by the agency over the controversial Staff Accounting Bulletin (SAB) 121.

SEC Offers ‘No Objection’ to BNY’s Plan 

The New York bank submitted its plan to the SEC’s Office of Chief Accountant for custody of two ETF-focused crypto assets. The securities regulator issued a no-objection to the BNY’s custody plan, meaning the bank won’t have to adhere to the recently passed SAB121 requirements.

The SEC chief noted that although the BNY plan was for two crypto assets, it didn’t matter what the crypto was,” suggesting the bank can offer crypto custody services beyond the Bitcoin and Ether ETFs, Gensler said. It’s up to the bank to decide whether they want to expand the number of cryptocurrencies they offer.

“Though the actual consultation related to two crypto assets, the structure itself was not dependent on what the crypto was,” Gensler said in an interview with Bloomberg.

Under BNY’s proposed plan, each crypto asset in the bank’s custody will have individual crypto wallets. These wallets will be linked to independent bank accounts, prohibiting them from mingling with bank customers’ funds.

SEC Lauds BNY Mellon Amid Uproar Over SAB 121

The SEC claimed that the BNY’s structure and custody plan were commendable. The SEC chief said that if any other bank or institution devised a similar plan, it would also receive a no-objection certificate from the agency.

Under SAB 121, an organization offering digital asset custody services for platform users must put the fair value of the assets on their balance sheet. This is quite in contrast to accounting standards and the practice of treating custodial assets as off-balance

The SEC issued the SAB 121 guidance in March 2022, followed by heavy backlash from the crypto community. However, the crypto winter, followed by bankruptcies from multiple leading crypto firms, supported the SEC’s deviation from standard practice.

However, the bulletin faced heavy scrutiny from lawmakers. 60 senators objected to the SEC’s SAB 121 for the first time, but the Biden administration vetoed it.

The approval makes BNY one of the first financial institutions to get exemptions from the SAB 121 requirements amid uproar from policymakers of both parties. Earlier in the week, Congressman Mike Floods accused the SEC of cutting backdoor deals with private firms and handing them no-objection certificates.

SAB 121 Could Lead to Concentration Issue

During the recently concluded Financial Service  Committee meeting, the SEC chief was grilled by lawmakers across the aisle. Most of the questions and disagreements were around the SEC’s handling of cases related to the crypto sector. 

Lawmakers grilled Gensler on the SEC’s reluctance to recall the SAB 121 despite significant objections from a record number of lawmakers. Congressman Flood called out Gensler for forcing  SAB 121 despite being “fundamentally flawed.” 

The Congressman said the SEC is now picking and choosing who gets to follow SAB 121 and who receives an exemption behind closed doors. He also raised the concentration of assets in the custody market due to favoritism by the SEC.

The SEC commissioner, Hester Pierce, acknowledged the Congressman’s concerns over concentration risks. She also revealed that the agency had given exemptions to specific firms.