A sea change in the United States’ approach to digital assets under the incoming Trump presidency could see major lenders turn to cryptocurrency custody services, a precursor to deeper engagement in space, even if the atmosphere before the inauguration on January 25 remains cautious.
Trump this month already nominated digital assets advocate Paul Atkins to replace noted crypto skeptic Gary Gensler as head of the Securities and Exchange Commission, and named fellow cryptophile David Sacks as intelligence chief artificial intelligence and cryptocurrencies at the White House.
“(Sacks) will work on a legal framework so that the crypto industry has the clarity it demands and can thrive in the United States,” Trump said earlier in December on his Truth Social platform.
The United States is expected to emerge with a basic legal framework for regulating crypto assets as well as a legal and legislative framework for blockchain use over the next 18 months, said Bruce Jackson, head of funds and digital asset activities at a financial services provider. Apex Group.
In particular, the nomination of Atkins and Sachs has raised hopes that the new administration will move quickly to repeal Special Accounting Bulletin 121, guidance issued by the SEC in 2022 that requires banks to report crypto assets held as a liabilities on their balance sheets, making such a service costly for lenders.
“Whether it’s an executive order or the SEC itself repeals it under new leadership … it’s something we expect to happen fairly quickly,” said Andrew O’Neill, head of digital assets analytics at S&P Global Ratings. .
Custody services have been one of the main “entry points” into the crypto space for traditional lenders in Europe and Asia, he noted, with the repeal of SAB 121 making such play much less difficult. The provision of such services is likely to prove an “attractive source of revenue for many of the larger institutions once all regulatory issues have been resolved”.
Even before the planned repeal of the directives, banks began to dip their toes in the water; BNY, the nation’s 12th largest lender by assets, obtained a “no objection” from the SEC in response to the bank’s determination that digital asset protection should not be classified as a liability on the balance sheet, thereby bringing the bank closer to providing digital assets. crypto custody services.
BNY currently supports 80% of SEC-approved Bitcoin and Ether exchange-traded products for large institutional players and digitally native clients, according to Caroline Butler, BNY’s global head of digital assets.
Assets under management for the Bitcoin and Ether spot funds managed by BNY stood at approximately $8.3 billion and $9.9 billion, respectively, as of November 2024, she added.
BNY has also made strategic investments in companies in the sector in recent years, including custody services provider Fireblocks and analytics and compliance company Chainalysis.
However, as Trump’s inauguration approaches in January, other major lenders remain cautious.
“The regulatory framework has to evolve… and everyone is speculating about how that regulatory framework will evolve, but it’s still not clear,” David Solomon, chief executive of Goldman Sachs, said at a event organized by Reuters in New York in early December.
If the rules change, the Wall Street giant will “evaluate” trading in major cryptocurrencies like Bitcoin and Ethereum, it told Reuters.
“But at the moment (…) our ability to act on these markets is extremely limited,” he added, stressing that cryptocurrencies were speculative assets.
A changing regulatory approach
Martin Hargreaves, chief product officer at Quant, said U.S. crypto regulation is unlikely to follow the European model, which has been “very institutional, very slow and thoughtful.”
“(It will) be more like the Pacific-Asia type models, where they are quite forward-thinking when it comes to (cryptocurrency), and they are probably five years ahead in terms of regulation,” Hargreaves said, noting progressive approaches. of regulators in Singapore, Thailand, Hong Kong and Japan.
The reluctance of U.S. lenders to allow customers to hold cryptocurrencies directly could point to third-party deals in the near term, he said, suggesting that “partnership deals between banks and custodians are likely to increase “.
Some major U.S. banks may even look to acquire cryptocurrency exchange companies as a new line of business “before their values increase even more,” he added.
In the short term, O’Neill said companies will likely increasingly look to allow a small allocation of their cash flow to bitcoin.
“Investors are looking to understand its opportunities, its risks (and) how it may perform within a portfolio of assets. (…) This means that institutions, whether asset managers or banks, must also be able to understand the needs of their clients in this regard,” O’Neill said.
O’Neill added that the US retail consumer sector will likely follow the trend in the UK, where fintechs have tried to “push crypto a little more” and provide crypto services to customers, but “the more traditional banks have so far held back”.
BNY’s Butler foresees an “acceleration phase” over the next three years, during which digital assets will mature and become more deeply integrated into the financial ecosystem, supported by increased global regulatory maturity.
