As Wall Street’s traditional custodians begin to eye the growing cryptocurrency market, the business of safeguarding digital assets is emerging as a high-stakes, lucrative opportunity. In contrast to the relatively straightforward task of holding stocks and bonds, custody in the cryptocurrency world has proven to be anything but mundane.
Crypto Custody: A Growing, Costly Market
The demand for crypto custody services, a market currently valued at around $300 million, has surged as the digital asset market continues to expand. According to Hadley Stern, Chief Commercial Officer for Solana custody tool Marinade, crypto custody costs can be up to ten times higher than securing traditional assets such as cash and securities. Stern, who previously headed digital asset custody at Bank of New York Mellon, explained that the high cost is a result of the volatile nature of the cryptocurrency market, a space prone to hacking and fraud.
This burgeoning field has become a target for both startups and established financial firms, as they seek to tap into the cryptocurrency ecosystem. As Campbell Harvey, a finance professor at Duke University, noted, “New entrants are betting that this market becomes substantially larger.”
Wall Street’s Cautious Entry into Crypto
Major custodial banks such as Bank of New York Mellon (BNY Mellon), State Street Corp, and Citigroup Inc. have already made initial steps into the crypto custody business. Despite the regulatory uncertainty surrounding digital assets, these institutions have begun to explore the possibility of offering services in this emerging market.
BNY Mellon announced its plans to build digital-asset custody infrastructure back in 2022, though it has yet to make significant progress. Nasdaq Inc., on the other hand, halted its crypto custody efforts in 2023, citing the complexities of navigating the regulatory landscape. Meanwhile, JPMorgan Chase & Co. has launched a project called Onyx, enabling blockchain payments between its clients. These developments, though measured, show Wall Street’s growing interest in the sector.
The Challenge of Regulatory Compliance
Crypto custody has been a contentious issue since the early days of cryptocurrency, with the popular phrase “not your keys, not your coins” symbolizing the mistrust many hold toward custodial services. Those who control the encrypted keys to digital wallets truly own the assets, leading to skepticism about third-party custody.
While custody firms have helped to reduce theft and hacks, the risk remains. Both Robinhood Markets Inc. and investment firm Galois Capital recently settled with U.S. regulators over crypto custody-related failings. “Both cases emphasize how important qualified custody is to institutional investors,” said Tim Ogilvie, Global Head of Institutional at Kraken, a crypto exchange that also provides custody services.
One of the main hurdles for traditional financial institutions is the U.S. Securities and Exchange Commission’s (SEC) rule known as SAB 121. This regulation makes it difficult for regulated firms to offer crypto custody services. President Joe Biden’s veto of Congress’s effort to overturn the rule has further complicated matters. Though a few banks have received exemptions, most are left waiting for regulatory changes before moving forward.
Tokenization: The Next Frontier?
Despite the challenges, Wall Street’s interest in tokenization—a process that converts traditional assets into digital tokens—continues to grow. In December, Depository Trust & Clearing Corp acquired Securrency to offer tokenized products, while State Street Corp selected Taurus to help with tokenization and digital-asset custody.
Donna Milrod, Head of Digital Asset Solutions at State Street, said, “This partnership would provide us with the technological foundation to offer, subject to regulatory approval, digital asset custody services once the regulatory climate, particularly in the United States, becomes more favorable.”
As the crypto market continues to evolve, Wall Street’s involvement remains cautious but deliberate. The promise of substantial growth in the crypto custody business, coupled with the potential for regulatory shifts, ensures that the financial industry will keep a close watch on this burgeoning market.