Tumblin’ Dice

Don’t say this too loudly – but are the custody banks cooling on crypto?

“I rob banks because that’s where the money is.” Willie Sutton, notorious bank robber, had this simple response when asked why he robbed banks. Every financial services regulator should have this quote framed and hung in their lobby. If in doubt, go after the banks, because that’s where the money is. Just ask any bank that, however tangentially, has been involved in a fraud – think Madoff – and has been forced to foot the bill, however unjustified.

Dear reader, banks may finally be getting smart (yes, I know, and I never thought I’d catch myself writing this, either). Consider a couple of recent headlines. “Crypto criminals snatched USD412m in February,” “Losses from crypto investment scams in the U.S. totalled USD3.94bn in 2023, an increase of 53pct compared to USD2.57bn in 2022, a new report by the Federal Bureau of Investigation has said. Fraudsters are increasingly using custodial accounts held at financial institutions for cryptocurrency exchanges or third-party payment processors, or having targeted individuals send funds directly to these platforms where funds are quickly dispersed,” the report said.

Whilst some believe that CBDCs have been specifically designed to kill the DeFi sector and, in the process, wipe out crypto currencies, the immediate challenge is how to clean up the marketplace. And yet…why should banks be involved at all? This is still the Wild West of finance – Coinbase being just the latest to demonstrate its complete lack of IT resilience – and there is absolutely no need for the banks to get involved.

Crypto is, at best, a marginal business that has all the hallmarks of a marketplace that invites fraud, deception and dirty money. Some banks realised this early on – step forward HSBC, Citi, BNP Paribas, J.P. Morgan, inter alia – and stayed well away. But, better late than never, nearly all the banks are waking up to the threats – yes, they’ve even dusted off their old SWOT analysis flipcharts – and, under the radar, have decided that crypto currency custody is not for them (Standard Chartered didn’t get the memo).

The recent rush to issue crypto ETFs in the U.S., following the typically late and ambivalent approval by the SEC, demonstrates the point. Banks are happy to do a lot of the work around crypto ETF issuance and administration – except for custody. Look at VanEck, one of the most vocal proponents of crypto ETFs, which listed its HODL BTC ETF with Gemini as its custodian. State Street was appointed as custodian of cash, fund accountant, transfer agent, ETF basket servicer and order-taker. Which role would you rather taken on?

State Street, for one, has taken a quiet but significant step back from its initial, all-in enthusiasm about all things digital. It no longer has its own, autonomous digital unit, following the departure of Nadine Chakar at the beginning of 2023. Instead, it lives in Donna Milrod’s world (she is chief product officer), and has seen some key defections as it continues to recalibrate its commitment.

BNY Mellon, too, seems to be discreetly downplaying its digital custody capabilities. When Roman Regelman announced his departure, BNY Mellon took the opportunity to shift digital asset custody into the markets division, under the leadership of Adam Vos. But…why doesn’t it live in the asset servicing unit under Emily Portney? BNY Mellon selected one of the industry’s finest – Caroline Butler – to run the digital assets custody business, but it looks as if that business might now become marginalised.

If the custody banks are not involved – and why should they be? – what is the real future of crypto? It’s already clear that fintechs and other non-banks are totally incapable of implementing the sort of controls and procedures that are second nature to the banks. Not before time, banks are waking up to this reality, and want to focus on tokenisation as – possibly – the only positive thing to come out of the digital soup.

A very thoughtful, and highly smart, trust bank CEO once said to me that, in his opinion, the best thing that could happen is that all crypto currencies collapsed to zero and then we could start all over again. Without the support of the deep-pocketed banks, that might happen sooner than you think.


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