Author: Yueqi Yang
Translator: Block unicorn
Some major US banks are aggressively entering the cryptocurrency service sector targeting large funds, investors, and traders, leveraging 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 business, which represents investors to hold Bit. One of the executives of Bank of New York Mellon, one of the world's largest stock and bond custodian banks, said the bank plans to launch digital asset custody services next year. Meanwhile, Bank of New York Mellon's top competitor, the Bank of New York, has already undertaken 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 US by assets, is also exploring ways to increase Bit custody services, either by building it themselves or collaborating with external companies, according to people familiar with the bank.
"Citi recognizes that the adoption of digital assets by institutional clients 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 Bit services for large clients. Currently, Bit companies like Coinbase, Anchorage Digital, and BitGo dominate the Bit 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 Bit world.
Custody is a behind-the-scenes service, but it is crucial as it is a springboard for banks to further penetrate the Bit 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 entrust Bit assets to banks rather than Bit companies, so their entry into the Bit space depends on the ability of banks to provide custody services.
Until recently, banks have been largely unwilling to directly handle Bit, 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 US Securities and Exchange Commission revoked accounting guidance from the Biden era, which effectively made it too costly for banks to hold Bit to consider.
Federal bank regulators are also overhauling their approach to Bit regulation, which previously scared banks away from the business. For example, the Federal Deposit Insurance Corporation once warned of the risks of Bit to the entire banking system, but is now paving the way for banks to engage in more Bit activities.
The Bit industry is closely watching the plans of US banks, as they may bring funds to the Bit market from large clients such as hedge funds, mutual fund companies, endowment funds, wealth management firms, and financial advisors, who collectively manage trillions of dollars.
This could significantly drive the development of the entire Bit 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 Bit investments, they will need places to store their Bit and companies to help them trade.
For example, the Bank of New York Mellon has seen increasing interest in Bit from endowment funds, wealth management firms, and registered investment advisors who want to entrust their Bit to banks. Caroline Butler, the bank's global head of digital assets, said the bank is seeking to increase its Bit custody clients in a "measured way".
The bank is also exploring providing custody services for asset managers who issue Bit and other Bit exchange-traded funds (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 Bit.
Banks can also leverage custody services to enter another hot Bit area: tokenization, or putting assets like bonds on the blockchain. The Bank of New York 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, Bank of New York Mellon aims to provide custody and transfer agent services - services that track asset ownership - for companies providing tokenized assets to investors. It can also offer 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 roll out these services for clients in phases starting with custody, subject to regulatory approvals, by 2026," said Donna Milrod, chief product officer at Bank of New York Mellon.
Meanwhile, Bit 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 Bit companies to build infrastructure or outsource services.
Coinbase, the largest Bit exchange in the US, wrote to US bank regulators earlier this month urging them to allow banks to launch Bit custody and trading services by outsourcing parts of these businesses to Bit companies. Brett Tejpaul, head of Coinbase Institutional, said he is having intensive two-day meetings this week with 10 US banks.
However, the product launches of many large banks may not be realized immediately. For example, Bank of New York Mellon still needs to obtain approval from the Federal Reserve to launch digital asset custody services in the US, Milrod said.
Trading Springboard
Once banks have Bit custody services, they can pave the way for launching more services, such as Bit trading and lending, as well as their core brokerage business, which provides a range of trading and other services for large clients like hedge funds. This will firmly establish banks in the territory of large Bit companies.
Trading giant Goldman Sachs caused a stir when it launched a Bit trading desk in 2021, but the bank still does not trade Bit directly. Instead, it trades Bit derivatives that are cash-settled, not actual Bit, as well as Bit and ETH futures listed on the CME.
Similarly, Citigroup only trades CME Bit futures in an agency capacity, meaning it facilitates client trades but does not use its own capital, according to a bank spokesperson.
But banks still have a long way to go in trading activities compared to providing custody services. The expansion of direct Bit trading, while potentially more profitable than custody, will face more regulatory scrutiny, as trading and lending typically pose greater risks to banks than simply overseeing clients' Bit.
And just because banks are allowed to do something doesn't mean they will - the volatility of Bit may make it expensive to meet the strict regulatory capital requirements facing large banks, and they will need to decide if trading Bit is the best use of their resources.
According to two people familiar with Goldman Sachs' digital asset plans, to trade Bit directly, Goldman Sachs would need approval from its primary regulator, the Federal Reserve. It would also need to obtain a BitLicense from the New York State Department of Financial Services to provide Bit services in New York.
Goldman Sachs will also evaluate whether it makes commercial sense to enter the spot Bit trading, one of the people said. A Goldman Sachs spokesperson declined to comment.
