BNY Mellon, founded by Alexander Hamilton in 1784 – the first US Treasury Secretary – has announced they are continuing to build out a highly advanced, robust, and secure digital assets custody business.
“Touching more than 20% of the world’s investable assets, BNY Mellon has the scale to help our clients reimagine financial markets through blockchain technology and digital assets. We are still in the early days of this evolution, but the possibilities are exciting. Today’s announcement marks a step in what we see as an ongoing innovation journey for our firm, our clients and the rest of the financial industry.”
-Robin Vince, CEO of BNY Mellon
BNY’s custodianship business is based on some of the very principles Hamilton wrote about in the late 1700s. They are both the largest and the oldest custodian bank in the world, with approximately $45T (Trillion) in Assets Under Custody (AUC). With their experience, brand recognition, and unique ability to utilize economies of scale – coupled with what appears to be a recent renewed peaking interest in digital assets – this move is an example of exceptional business strategy.
The Timing of BNY Mellon’s Announcement
The timing of the announcement is interesting for a number of reasons. Firstly (likely the primary reason), the Sibos Update conference, which initially lasted from 10/10-10/13. BNY had a very large presence and rolled this news out in parallel. Secondly, we’re at an absolutely critical point in macroeconomic policy. Will the Fed’s decision to hike up rates to deflate the inflation work? Did they start too late? What’s the impact on US and global financial markets? Presently, those questions are central to investors every single day.
Generally, during recessionary cyclical economic times, at-risk assets don’t do well (to say the least). Cryptocurrencies and digital assets are in the heart of today’s at-risk assets category – though that may be slowly changing. Regardless, during such a time of economic uncertainty, rolling out a high-tech, revolutionary custodianship service for digital assets is interesting. That leads me to the next timing overlap.
The SEC’s Ongoing Persistence of Rejecting Bitcoin Spot ETF Proposals
The SEC has been on a roll with rejecting Bitcoin spot ETFs. Coverage of this began intensifying when they rejected Grayscale GBTC’s conversion request from a SEC-approved Bitcoin Trust to an SEC-approved Bitcoin spot ETF. Grayscale immediately retained Donald Verrilli Jr., who subsequently filed a quick appeal. Verrilli is best known for making a successful oral argument to the US Supreme Court in favor of the ACA (Obamacare). Afterwards, any new Bitcoin ETF – especially spot ETFs – were widely covered by the media and enthused investors. This announcement came on October 11th, 2022, the same day WisdomTree’s Bitcoin spot ETF application was rejected by the SEC, which is also coincidentally the same date the SEC had a deadline to respond to VanEck’s appeal of their previously rejected Bitcoin spot ETF. To note, the SEC has now missed their 45-day deadline to respond.
Bear in mind, VanEck is not heavily exposed in digital assets at all. They are a highly reputable institutional investment firm, with one SEC-approved Bitcoin Strategy ETF on the market. As all other currently SEC-approved Bitcoin ETFs, VanEck’s Strategy ETF is a Bitcoin futures ETF. Nonetheless, BNY Mellon – very likely coincidentally, admittedly – announced this launch on the same day as two highly anticipated SEC rulings on digital asset products.
Expected Impact for the Digital Asset Market
The impact, especially in the longer-term, is potentially massive. Let’s remember the primary, above-and-beyond, number one reason the SEC is rejecting Bitcoin spot ETFs: security. Grayscale’s SEC-approved GBTC Bitcoin Trust advertises and details the product’s custodianship. The custodian is Coinbase Custody Trust Company, LLC. In other words, at least from the branding, the custodian of the cryptocurrency product is a cryptocurrency-specific custodian. Continuing with the Grayscale example, this makes their rebuttal to the SEC more difficult. Is there any remotely tangible security added if a cryptocurrency product is in the custody of another cryptocurrency-specific firm? I don’t doubt Grayscale’s ability to make a compelling and technically robust argument, but I seriously doubt the SEC’s acceptance.
What if the scenario remains the same, with the only change being the custodian. With very few exceptions, in my opinion nothing really changes. That is, unless the custodian is BNY Mellon. Some, including myself, might argue that turns the dynamic in the other direction. If GBTC is held in the custody of BNY Mellon, would the SEC still cite security concerns? Unimaginable. BNY Mellon’s brand is iconic when it comes to custodianship services in global banking. Through this core offering, BNY Mellon alone winds up touching over 20% – or more than 1 out of every 5 USD (or global currency equivalent) – throughout the entire world. That’s astounding. Keeping in mind they are the oldest bank and the oldest publicly traded company, BNY must be doing something right in custodianship services.
Security Has Always Been Paramount in Custodian Banking
With custodianship banking generally, security is definitely mission critical. BNY has provided this service, highly successfully, arguably longer than any other service offered by any institution. They’ve been evolving the custody banking sector since the late 1700s. Back to the SEC, if I’m looking at GBTC in the custody of BNY Mellon, I don’t see any compelling argument for security concerns. If anything, I’d see that as more of comical reasoning. The SEC could always pivot to another, more plausible concern if (when) that were to happen, but it’s still a huge win for the digital asset market – as well as BNY Mellon.
As a final note here, the SEC is rejecting Bitcoin spot ETFs at an increasing rate, meaning applications are growing. More and more firms are attempting to get SEC-approved Bitcoin products into the marketplace. Clearly, they’re prognosticating an increase in investor demand for digital asset products and are attempting to respond accordingly. Let’s also be clear – investors and investment firms aren’t required to get SEC clearance to sell Bitcoin derivatives.
That said, of course it’s highly preferred. In an asset class still largely plagued by uncertainty, SEC approval is an immediate, gigantic game-changer. BNY Mellon holding custody of digital assets on an in-house, BNY Mellon digital assets custody platform changes cryptocurrency market dynamics. It also likely puts cryptocurrency-specific custodians out of business, amongst other market effects. One would think it’d have to alter the SEC’s position substantially and broadly on digital assets. In turn, that should similarly substantially and broadly alter investor perception of digital assets.
Could Anything Go Wrong?
Always. On a more serious note, even Alexander Hamilton was famously quoted saying, “I never expect a perfect work from an imperfect man”. From my perspective, BNY Mellon is not only the biggest risk-taker here; they are the biggest by a landslide. This is a company that was founded by the first US Treasury Secretary and has only improved their initial, core offering over time. The SEC also isn’t raising concerns over security as a completely illegitimate excuse. We’ve seen Ethereum wallets hacked, viruses created to successfully steal Bitcoin, cyber-attacks against crypto exchanges, and more. BNY Mellon will have the sole responsibility to ensure none of that occurs on their watch, so to speak. What if they fail? That’s exactly the point at which this could all go terribly wrong.
BNY Mellon built a brand with the core focus on custodian banking spanning the course of over 225 years. They are widely considered to be the most prestigious and critical institutional investment services firm in the world. Now they’ve made a major move into the digital asset space, an admittedly enticing and potentially extremely lucrative strategy. However, in banking, all it takes to bring down a reputation built over 225 years is one mistake in seconds.
To be sure, there’s added nuance here. Digital assets are naturally going to be more susceptible to evolving technologies as digital assets themselves are an evolving technology. Cybersecurity preventability measures and the sophistication of cybersecurity attacks have both increased. In the age of digital transformation, I believe this is a correctly calculated risk for BNY Mellon.
Extent a Momentary Error Could Hurt BNY Mellon’s Core Business
While there can be little to no doubt a security issue coming from BNY’s digital asset custody platform would be detrimental to the company – potentially in a very large way – the same can be said for the likelihood of that instance actually bringing down what BNY’s built in over 225 years. Even if the world’s most secure custodian has a security malfunction, I don’t believe it would even impact their current business model. It may take them out of digital asset custody services – I think even that is reaching – but again, I don’t see it majorly tarnishing the brand.
All-in-all, this is a win-win scenario, statistically speaking. Yes, something could go wrong. When this platform is ready for go-live and it’s used broadly, we’ll get a better sense of the impact. But BNY especially would not dramatically – out of character – launch a futuristic digital assets custody platform that didn’t meet the mark from a technology perspective.
There shouldn’t be doubt BNY made budgetary concerns a main priority, or even an obstacle, of this project. The team they’ve assembled is comprised of the brightest, most experienced, innovative SME’s in their respective areas. This continuing work-in-progress originated in 2019 and is just now starting to be publicly rolled out in a significant way. BNY likely took 3 years to ensure they had capacity to build a product worthy of publicly announcing is work-in-progress. They notably take perfection seriously; I doubt many disbelieve they’re going to rollout an incredible product. Whether perfection in digital assets custody is attainable is a separate discussion, but if anyone could, it’s BNY Mellon.