From Bank of New York to Citigroup, Wall Street is getting into crypto

Article author: Yueqi Yang

Article translation: Block unicorn

Some of the largest U.S. banks are moving aggressively into cryptocurrency services for large funds, investors and traders, taking advantage of a rapid deregulation under President Donald Trump to launch digital asset versions of businesses they have long dominated.

Currently, most of the action involves custody, which is the safekeeping of cryptocurrencies on behalf of investors. State Street, one of the world's largest custodians of stocks and bonds, plans to launch digital asset custody services next year, an executive said. Meanwhile, State Street's top rival, Bank of New York Mellon, already has a small custody business for Bitcoin and Ethereum, but plans to expand it to more types of tokens.

Citigroup, the third-largest U.S. bank by assets, is also exploring ways to add cryptocurrency custody services, both by building its own and working with outside firms, people familiar with the bank said.

“Citi recognizes that adoption of digital assets by institutional clients is accelerating,” a Citi spokesperson said. “We are also working with clients to develop asset tokenization and digital asset custody capabilities.”

Overall, the plans could represent a reshuffle of power between Wall Street and cryptocurrency-focused firms as banks expand key cryptocurrency services for big clients. Currently, cryptocurrency firms including Coinbase, Anchorage Digital and BitGo dominate the cryptocurrency custody space, while Galaxy Digital, FalconX and Hidden Road offer trading services to large investors and traders, essentially making them the Wall Street of the cryptocurrency world.

Custody is a behind-the-scenes service, but it is crucial because it is a springboard for banks to move further into cryptocurrencies in institutional businesses such as trading and lending, which are the lifeblood of Wall Street banks. Traditional asset managers may also prefer to custody crypto assets with banks rather than cryptocurrency companies, so their entry into the cryptocurrency space depends on banks' ability to provide custody services.

Until recently, banks were mostly reluctant to deal directly with cryptocurrencies, citing regulatory hurdles and the risks of the volatile and relatively new asset class. But in the first week of the Trump administration, the Securities and Exchange Commission rescinded Joe Biden-era accounting guidance that had effectively made it too expensive for banks to hold cryptocurrencies to consider.

Federal bank regulators are also overhauling their approach to regulating cryptocurrencies, after previously scaring banks away from the business. The Federal Deposit Insurance Corporation, for example, has warned of the risks of cryptocurrencies to the banking system as a whole, but is now clearing the way for banks to engage in more cryptocurrency activities.

The cryptocurrency industry is closely watching Bank of America’s plans because they could bring money to the cryptocurrency market from big clients such as hedge funds, mutual fund companies, endowments, wealth managers and financial advisers who collectively manage trillions of dollars.

That could significantly boost the overall cryptocurrency market, which is currently valued at about $3.2 trillion, with Bitcoin and Ethereum accounting for nearly 70% of the market cap. As traditional companies seek to make more cryptocurrency investments, they will need places to store their cryptocurrencies and companies to help them trade them.

For example, Bank of New York Mellon has seen growing interest in cryptocurrencies from endowments, wealth managers and registered investment advisors who want to custodian their cryptocurrencies with the bank. Carolyn Butler, global head of digital assets at Bank of New York Mellon, said the bank is looking to add more cryptocurrency custody clients in a "measured way."

The bank is also exploring offering custody services to asset managers that issue bitcoin and other cryptocurrency exchange-traded funds (ETFs), a business currently dominated by Coinbase. Most fund companies that offer popular bitcoin ETFs, including giants such as BlackRock and Franklin Templeton, use Coinbase to custody billions of dollars worth of cryptocurrencies.

Banks can also use custody services to enter another hot cryptocurrency area: tokenization, or putting assets such as bonds on a blockchain. BNY Mellon is considering using custody services to support tokenized assets such as money market funds. “It powers all the other services related to custody,” Butler said.

Similarly, State Street aims to provide custody and transfer agency services — services that track ownership of assets — to companies that offer tokenized assets to investors. It could also offer a service that helps clients manage the process of using tokenized assets as collateral, which would make these blockchain-based assets more useful to traders and drive adoption.

“Our plan is to offer these services to clients in phases through 2026, starting with custody, subject to regulatory approval,” said Donna Milrod, chief product officer at State Street.

At the same time, cryptocurrency companies are looking for ways to avoid being completely squeezed out by Wall Street, and they believe that many banks will want to work with cryptocurrency companies, at least initially, to build infrastructure or outsource services.

Coinbase, the largest cryptocurrency exchange in the United States, wrote to U.S. banking regulators earlier this month, urging them to allow banks to launch cryptocurrency custody and trading services by outsourcing parts of these operations to cryptocurrency companies. Brett Tejpaul, head of Coinbase Institutional, said in an interview that he is in two days of intensive meetings this week to negotiate with 10 U.S. banks.

However, product launches from many of the largest banks won’t happen immediately. For example, State Street still needs approval from the Federal Reserve to launch digital asset custody services in the U.S., Milrod said.

Trading Springboard

Once banks have cryptocurrency custody services, it could pave the way for launching more services such as cryptocurrency trading and lending, as well as prime brokerage, a range of trading and other services for large clients such as hedge funds. This would put banks more firmly in the realm of large cryptocurrency companies.

Trading giant Goldman Sachs made a splash when it launched a cryptocurrency trading unit in 2021, but the bank still doesn’t trade cryptocurrencies directly. Instead, it trades cryptocurrency derivatives, which are settled only in cash, not actual cryptocurrencies, as well as CME-listed bitcoin and ethereum futures.

Likewise, Citigroup trades CME bitcoin futures only in an agent capacity, meaning it facilitates client trades but does not use its own capital, according to a spokesperson for the bank.

But banks still have a long way to go in trading activities compared to offering custody services. An expansion into trading cryptocurrencies directly, while potentially more lucrative than custody, would face more regulatory scrutiny because trading and lending are often riskier for banks than simply overseeing clients’ cryptocurrencies.

And just because banks are allowed to do something doesn’t mean they will — the volatility of cryptocurrencies could make it expensive to meet the strict regulatory capital requirements faced by large banks, which will need to decide whether trading cryptocurrencies is the best use of their resources.

To trade cryptocurrencies directly, Goldman would need approval from its primary regulator, the Federal Reserve, according to two people familiar with its digital asset plans. It would also need a BitLicense from the New York State Department of Financial Services to offer cryptocurrency services in New York.

Goldman will also evaluate whether it makes business sense to enter spot cryptocurrency trading, one of the people said. A Goldman spokesman declined to comment.