BNY Mellon’s Bitcoin ETF Custody Service: Coinbase Dominance At Stake?

America’s largest custodian bank, BNY Mellon, is on track to launch a Bitcoin Exchange-Traded Fund (ETF) custody service. When fully operational, this service will challenge the Coinbase Custody product for spot Bitcoin ETF issuers.

The launch of the Bitcoin ETF custody service allows BNY Mellon to serve institutional investors, expanding its reach in the crypto ecosystem.

Details of the BNY Mellon Bitcoin ETF Custody Service

According to a Bloomberg report, a review by the US Securities and Exchange Commission (SEC) allows BNY Mellon to avoid categorizing digital assets as a balance sheet liability.

“The review, conducted earlier this year by the Office of the Chief Accountant at the Securities and Exchange Commission, didn’t object to BNY’s determination that the safeguarding of crypto assets for its regulated exchange-traded product clients shouldn’t be recognized on BNY’s balance sheet,”

the bank told Bloomberg.

BNY Mellon launched its digital asset custody initiative in October 2022. The Bank’s strategy was to treat crypto similarly to more traditional assets, which were not recorded on its balance sheet. However, the bank encountered challenges with the SEC’s Staff Accounting Bulletin (SAB) 121.

SAB 121 compels corporations that hold crypto assets to list them on their balance sheets and generate a liability equal to their worth. The crypto industry has long decried the rule as unduly restrictive.

However, BNY Mellon may have found a way forward, with the SEC giving a non-objection to BNY’s crypto custody plans. The bank’s crypto custody service may be a turning point in the institutional use of cryptocurrencies. The bank’s entry demonstrated recognition of Bitcoin and other cryptocurrencies as legitimate financial instruments.

Is There a Trust Strain Between BlackRock and Coinbase?

BNY Mellon’s foray into the crypto ETF custody market may eventually threaten Coinbase’s dominance. Coinbase offers custodian services to most U.S. spot Bitcoin ETF issuers, including the biggest, BlackRock.

Meanwhile, concerns have been raised over Coinbase’s custodial practices. Investors expressed concerns that Coinbase was buying “paper BTC,” or IOUs, for Bitcoin ETF issuers, thus suppressing the price.

Unfortunately, Bitcoin’s price has stagnated over the past three months despite surging inflows into Bitcoin ETFs, giving credence to investors’ concerns.

Amid these challenges, BlackRock filed an amendment with the SEC to modify its Bitcoin ETF structure. The amendment requires Coinbase to process BTC withdrawals within 12 hours of receiving an instruction.

This minor strain might make issuers switch to alternative custody service providers if left unchecked.

Will More Banks Join to Topple Coinbase’s Dominance?

There are rising speculations that the SEC’s exemption could signal a shift encouraging more traditional banks to participate in cryptocurrency. This aligns with comments from BNY Mellon’s CEO, Robin Vince, about the bank’s preparations for a more active role in the digital asset space.

Intriguingly, Wells Fargo and JPMorgan, two well-known banking giants, disclosed earlier investments in Bitcoin ETFs.  Wells Fargo reported holding 37 shares of the ProShares Bitcoin Strategy ETF (BITO). JPMorgan also disclosed holdings of $731,246 in Bitcoin ETFs from BlackRock, Bitwise, Fidelity, and Grayscale.

The banks’ interest in crypto investment products is expected to attract new investors into the market. Therefore, the idea of more banks joining BNY Mellon to challenge Coinbase’s dominance does not seem far-fetched.