Traditional financial custodians enter the crypto market

An interesting recent development in the crypto market is the increasing introduction  of institutional crypto custody services, setting new benchmarks in the crypto industry.

The adoption of Bitcoin and Ether ETFs this year has attracted growing acceptance in mainstream finance. As a result the institutional demand for secure, compliant and flexible custody services has firmly grown

End September the SEC approved the crypto custody proposal by NYC Mellon, the world’s largest custodian bank, allowing them to offer custody services not only for Bitcoin and Ether ETFs, but also for other crypto assets.

In this blog I will go into more detail into what this will mean for the crypto sector and how it will transform the traditional financial landscape.

Importance of custody services in the crypto world

In the context of cryptocurrency, custody services are particularly important due to the complex nature of securing private keys, which are essential for accessing and transferring crypto assets.

Crypto custody services act as digital security fortresses. They imply robust security measures to safeguard private keys and protect them against online attacks such as theft and fraud, while safeguarding the relevant data.

And there is the issue of the constantly evolving regulatory landscape surrounding crypto assets. Crypto custody services should also prioritize regulatory compliance ensuring they operate within the legal framework, thereby minimizing the legal and financial risks associated with non-compliance. Next to that regulatory oversight will foster transparency in the operations of the custodian, building trust with investors.

Another important element is crypto custody insurance that should function as a financial safety net, adding another layer of security. It may offer insurance coverage against various threats, such as cyberattacks, as well as operational errors that could lead to problems in invested crypto.

Present custody market

The cryptocurrency market, valued at roughly $2 trillion, has birthed a niche yet crucial service sector: crypto custody. The present crypto custody market is still relatively small and is estimated to be worth around $ 300 million but the industry is reportedly growing by 30% annually.

Currently, crypto-native firms like Coinbase and BitGo dominate the market. These companies have built their services from the ground up to address the specific needs of digital asset storage and security. This market however is catching the attention of traditional financial institutions.

Crypto custody landscape: ‘from self-custody ….

The present crypto custody landscape offers a wide variety of custodial options to choose from, each suitable for different purposes and each with its own advantages and drawbacks. Therefore, institutions must consider several factors before selecting the right provider for their business.

These custody options range from self-custody to managed custody by enterprise-level custodial providers that offer robust security features like multi-signature protocols

With self-custody institutions can choose to manage their own private keys that may unlock access to their crypto holdings. Institutions can thereby retain ownership and control over their private keys. But there are significant risks, such as losing their private key that may lead to permanent loss of access to the funds. The reality is that those solutions often lack the necessary security and compliance requirements of institutional players such as global custodian banks. As a result institutions need to implement robust security measures to protect their private key from hackers or internal threats. This makes it a less-than-ideal option for most institutions.

…. to managed custody

When using managed custody institutions place management, storage, and movement responsibilities on a third party. These digital asset custody providers such as crypto exchanges and dedicated custodians play a similar role in the secure and compliant storage of financial assets. However, cryptographic keys (also known as “private keys” or “secret keys”) are required to access and move these assets.

Managed custody may require less operational overhead, as the third-party provider is responsible for storing and safeguarding private keys. However, this can lead to greater (counter-party) risk, as the safekeeping of the private keys is entrusted to someone else and, therefore, relinquishing control over their assets. While some specialised services could come at a premium cost.

Managed custody solutions may work for some, but the standardised approach can impact an institution’s ability to operate at scale for others. In the short term — and perhaps without adequate knowledge of the different types of solutions — quickly onboarding a managed custody solution may seem appropriate, but it can hinder long-term growth.

Traditional financial institutions are entering the crypto custody market

Long time institutional investors showed a wait-and-see attitude in the cryptocurrency space. Traditionally financial institutions long time have been hesitant to offer crypto custody services due to the uncertain regulatory environment  surrounding the treatment of digital assets on balance sheets.

This uncertainty stems from concerns about whether such assets should be considered liabilities or merely custodial holdings, impacting risk, capital requirements and overall financial reporting.

But that attitude is changing. A recent survey sponsored by BNY Mellon highlights already significant institutional demand for a resilient, scalable financial infrastructure built to accommodate both traditional and digital assets. According to the survey, almost all institutional investors (91%) are interested in investing in tokenized products. Additionally, 41% of institutional investors hold cryptocurrency in their portfolio today, with an additional 15% planning to hold digital assets in their portfolios within the next two to five years.

The growing institutional interest across banking and financial institutions in digital assets, largely driven by new innovative use cases such as stablecoins, CBDCs, real world asset (RWA) tokenization like stocks, bonds, commodities and real estate, ETF and ERPs, has surged institutional demand for regulated, secure and compliant custody services. Institutional investors plan to heavily incorporate crypto custody services into their business models within the next three years.

Global custody powerhouses are showing greater interest

Major  traditional financial institutions are increasingly entering the crypto market to offer crypto custody services. Triggered by the fact that crypto custody can cost up to ten times more than protecting traditional assets like stocks and bonds.

Global powerhouses in custody services, including BNY Mellon, Standard Chartered, Citigroup, and State Street, have shown interest in entering the crypto custody arena, trying to position themselves at the forefront of this next evolution in the custody business.

SEC BNY Mellon non-objection from SEC

BNY Mellon, America’s largest custodian, has received regulatory non-objection from the Securities and Exchange Commission (SEC), for its proposed structure for digital asset custody for expanding its crypto custody services to institutional clients beyond its initial Bitcoin and Ethereum exchange-traded fund (ETF) plan thereby bypassing SAB21.

BNY Mellon introduced a new custody structure to bypass legal constraints in digital asset custody. Its proposed structure includes the use of individual crypto wallets. Each of these wallets would have a distinct bank account to separate the bank’s funds from custodial assets.

This structure will ensure customer digital assets are safeguarded and segregated from the bank’s own assets in the event of insolvency, without listing them as balance sheet liabilities. With this structure, the assets of investors custodied by BNY Mellon will be protected in the case of bankruptcy or in the event of insolvency..

BNY Mellon’s role in safeguarding cryptocurrencies like Bitcoin and Ether for its exchange-traded products no longer require the bank to classify these digital assets as balance-sheet liabilities. It allows BNY Mellon to treat the crypto assets it holds for clients similarly to traditional assets like stocks or bonds, which are not recognized as liabilities on the bank’s balance sheet. This exception allows BNY Mellon to provide institutional crypto custody services, including Bitcoin, as part of its core business activities.

The custody structure is not limited to specific crypto assets. Its model could also be applied to other digital assets, offering flexibility in scaling its crypto services.

The move makes it significantly easier for the bank to offer custody services and adhere to regulatory requirements. BNY Mellon recently announced that its Digital Asset Custody platform is live in the U.S.

Other banks and custodians are not standing still

The SEC’s decision sets a precedent for how other financial institutions may approach crypto custody, providing a roadmap for other banks and custodians to offer similar services without being burdened by balance-sheet liabilities. It allows other banks to adopt the same model when offering crypto custody and expands the digital assets they can custody. 

Meanwhile, other major banks are not standing still in their crypto custody ambitions. Crédit Agricole and Banco Santander’s asset servicing joint venture has already received crypto custody approval from French regulators. Standard Chartered launched a digital asset custody facility in the Dubai International Financial Centre in May, while HSBC that announced plans to launch an institutional-grade custody service for digital assets in 2024.

Standard Chartered starts custody services for digital assets in the UAE

Standard Chartered is among several banks that have been extending their foray into the crypto sector as more institutional investors adopt the asset class. Standard Chartered had begun offering digital asset custody services in the United Arab Emirates.

The service, which enables clients to safekeep their digital assets, has launched in the UAE due to its well-balanced approach to digital asset adoption and financial regulation, and marks a significant milestone in the Bank’s digital asset strategy

Their offering goes beyond simple wallet services – it is a comprehensive solution that addresses the unique challenges of digital asset custody from a regulatory, risk and prudential point of view. The Bank plans to broaden its scope in the coming months to encompass a wider range of digital assets, and is actively exploring opportunities to extend its custody services to other key financial hubs in its footprint markets.

HSBC announced plans to launch institutional-grade custody service

HSBC announced plans to launch an institutional-grade custody service for digital assets including tokenized securities in 2024, expanding its blockchain and digital asset offerings. The custody platform will complement HSBC’s existing digital asset offerings.

The service will be developed in partnership with Metaco, a crypto custody technology provider recently acquired by Ripple. With these services, HSBC aims to provide a complete tokenized asset solution for institutional investors looking to explore blockchain-based capital markets.

The custody service will focus on safekeeping tokenized versions of traditional securities like bonds, structured products, and other assets issued on public and private blockchains. It will not support cryptocurrency custody initially.

HSBC’s timely entry into this space signals growing trust in digital asset infrastructure. The custody platform will integrate with its token issuance and trading systems to provide a robust end-to-end solution for institutional clients.

SIX Digital Exchange to Offer Custody Services for Institutional Traders 

SIX Digital Exchange (SDX) has secured a strategic partnership with RULEMATCH to offer end-to-end crypto trading and custody services to financial services companies. The new services will be made available by the end of the fourth quarter 2024.

This partnership allows a  clear separation of trading and custody roles, whereby SDX will handle the custody of the digital assets for customers. This means institutional investors retain full control over their collateral via SDX’s custody and can segregate assets by crypto address, ensuring clarity on asset location at all times.

The Swiss exchange has been serving as a custodial for customers since November 2023 when it teamed up with DLT Finance to deliver end-to-end trading and custody services to institutional customers.

The partnership with SDX will provide RULEMATCH customers the opportunity to explore the benefits of an independent custodian while engaging with the crypto industry, providing institutional customers full control of their digital assets at all times. However, banks and other financial institutions in the United States will not be able to access the offer as the company is not available in the country.

Taiwan Local Banks crypto custody trial in 2025

Another interesting crypto custody trial is happening in Taiwan. The Taiwan Financial Supervisory Commission (FSC) announced its plan to promote the trial of crypto custody solutions while encouraging traditional financial institutions  to participate. The trial is primarily targeted at institutional investors, aimed at boosting institutional crypto adoption .

The trials seek to advance financial services in cryptocurrency, making it possible for banks to manage and store Bitcoin, Ethereum and other cryptocurrencies. Aim of this trial is to improve the security and reliability of financial operations related to cryptocurrencies. Thereby improving investor protection and encouraging greater adoption of digital currencies.

The regulator intends to work closely with local banks to develop high security standards, ensuring that digital assets are protected from cyber-attacks and potential fraud.

Onderkant formulier

Ripple launches bank-grade Custody Services for Digital Assets

But also traditional crypto platforms such as Ripple are increasingly bring in innovations in crypto custody that should attract more institutional investors that seek secure, regulated custody solutions for their digital asset portfolio.

Ripple announced the launch of new features and functionality to Ripple Custody  that works with Ripple’s blockchain platform, known as the XRP Ledger, to bring bank-grade custody technology to fintechs and crypto businesses.

This expansion aligns with the increased integration of blockchain in traditional finance. These updates aim to serve fintech companies and crypto-native businesses with a secure and compliant platform.

Ripple Custody now supports XRP Ledger tokenization features, enabling businesses to tokenize and manage a wide range of real-world assets, including cryptocurrencies, fiat currencies, and real-world assets while facilitating digital asset issuance and secure transfers directly from its platform.

With new features, Ripple Custody is expanding its capabilities to better serve large banks and fintech businesses with secure and scalable digital asset custody. With Ripple Custody, banks can store their digital assets securely. With this integration, banks can easily keep track of their digital assets, just like they would manage their cash.

Its solution is offered across the largest global financial markets including Switzerland, Germany, France, the United Kingdom, the United States, Singapore and Hong Kong.

Further on Ripple is acquiring US-based enterprise-grade regulated digital asset custodian Standard Custody & Trust Company, a move that will expand its services in the crypto industry, allowing for better institutional customer service to tokenize, store, move and exchange value. 

“As we integrate custody more deeply into Ripple’s products, we see clear synergies with Standard Custody to complement our payments and custody offerings – all in service of being a one-stop shop to move, convert and store value with blockchain”, Ripple

More established financial institutions will enter the crypto custody space

Custody is a key entry point for institutions into the digital asset economy, and it is only growing. The global custody market is expected to reach at least $16 trillion by 2030, and moreover, 10% of the world’s GDP is expected to be tokenized by 2030. As such, companies need secure, compliant and flexible options to store their crypto.

In the coming years, as the cryptocurrency market matures, we can expect to see more established financial institutions entering the crypto custody space, each bringing its own expertise and solutions to meet the unique challenges posed by digital assets.

They may play a growing role in crypto custody, thereby offering a number of important benefits. Established financial institutions have a well-earned reputation for security and reliability when it comes to safeguarding assets. These financial institutions that are subject to stringent regulatory oversight, possess robust security protocols and infrastructure. They can leverage this expertise to create secure custody solutions for cryptocurrencies, employing measures like multi-signature wallets, hardware security modules (HSMs), and advanced encryption.

This may bring more competition in the crypto custody space.

Regulatory clearance

One of the most frequently cited obstacles to asset tokenization is legal and regulatory uncertainty, as well as the lack of standards. Fragmented regulation makes life difficult for all operators in the ecosystem, including custodians.

But there is more positive change in the stance of regulators toward crypto assets. The SEC’s decision also reflects the evolving stance of U.S. regulators toward cryptocurrency. By clarifying how crypto assets should be treated on balance sheets, the SEC is helping pave the way for broader institutional participation in the crypto economy.

While concerns about market volatility, fraud, and investor protection remain, regulators worldwide, including the UK and the EU (MICA) are increasingly recognizing the need for a clear regulatory framework that allows institutions to engage with digital assets while mitigating risks.

World Federation of Exchanges: Good Practice for Crypto-Asset Custody Providers

The World Federation of Exchanges (WFE), the global industry association for exchanges and central clearing counterparties, has published recommendations that establish good practice for crypto-asset custody providers. The crypto industry should be held to higher standards closer to that of well-functioning finance, ensuring stronger protections for investors.

The present inadequate custody control amongst crypto platforms, which underscores the risk to both market integrity and investor protection should be further addressed. Propre custody controls should prevent the risk of financial loss, theft, fraud and mismanagement.

BNY Mellon is thereby following the recommendations of WFE such as segregating client assets to ensure they are protected in the event of a company’s bankruptcy. And ensuring client assets remain bankruptcy-remote, i.e. separate from those of other persons, whether legal or natural.

Forward looking

BNY Mellon’s approval to launch its crypto custody services marks a significant milestone, opening the door for other traditional banks to enter the cryptocurrency industry.

BNY Mellon’s entry into the crypto custody space signals that digital assets are becoming a permanent fixture in the financial landscape. They are not only here to stay, but are  becoming part of the mainstream financial infrastructure.

The SEC’s decision may represent a crucial step forward for the broader mainstream adoption of crypto services by institutional investors that seek secure, regulated custody solutions for their digital asset portfolio.

The anticipated growing number of traditional financial institutions offering crypto custody services could help to bridge the gap between the traditional financial world and the emerging digital asset space.

The stage is set for crypto assets to become an integral part of the global financial system, transforming how assets are stored, managed, and exchanged in the digital age.