Bank of New York Mellon holds crypto now

Big banks deal with crypto

America’s oldest bank is dipping its toes into the financial world’s newest trend. But BNY Mellon’s announcement that it will begin holding crypto assets for its clients comes a week after the Treasury Department warned about major banks and investment firms dealing in digital assets.

Institutional investors want in. Crypto mania is strong on Wall Street, with 91% of institutional investors saying they are interested in “investing in tokenized products,” according to BNY Mellon’s survey.

• About 41% already have crypto in their portfolio, while 15% said they plan to add digital assets in the next two to five years. Chief executive Robin Vince said in a statement that it makes sense for BNY Mellon to join the party, given that the bank has “the scale to reimagine financial markets through blockchain technology and digital assets.”
• Other major institutions are already in crypto. BlackRock, the world’s largest asset manager, has teamed up with Coinbase to offer customers access to bitcoin and other cryptocurrencies. State Street said it plans to offer digital custody services for cryptocurrencies and other digital assets.
• JPMorgan Chase has invested in crypto companies, including blockchain intelligence company TRM Labs, despite CEO Jamie Dimon’s public skepticism about crypto. Just last month, Dimon dismissed crypto tokens as “decentralized Ponzi schemes.”

There are serious risks “from concentrated exposures” to large banks and institutions, according to a recently released report on crypto by the Financial Stability Oversight Council, part of the US Treasury Department.

• The crypto crash wiped out $2 trillion in value in just a few months. The good news is that the US banking system’s exposure to crypto appears to be “very limited,” so the market collapse had little impact on the overall financial system, the report said.
• But “small exposures have the potential to grow quickly.” That could become a big problem given how the crypto ecosystem lacks “fundamental risk controls to protect against risk” and cryptoassets “seem to be primarily driven by speculation rather than rooted in current fundamental economic use cases.”

It’s a crypto Catch-22. Banks are “waiting for regulatory clarity” before going deeper into crypto, the report said. But these much-anticipated regulations could trigger the crypto expansion in the financial system that worries the Treasury Department.

• “It’s kind of a two-pronged issue,” said Klaros Group director Patrick Haggerty. US authorities have seen crypto waxing “very rapidly” over the past two years. “If they don’t bring it into the regulatory realm, it’s a little more difficult to do that once there’s a more powerful lobby group. So take it in now, he told Protocol.
• The crypto industry is evolving, said Jesse Proudman, vice president of crypto investing at Betterment. There have been bad actors, but there are also “actors here who are all trying to do the right thing” and “trying to operate within the boundaries and goals of being a good operator”, although “it’s a challenge to do that without the the clarity,” he told Protocol.
• In an ironic twist, the crypto crash has actually brought some clarity. “Getting over-leveraged players out of the market and then having a road map for regulations – that’s good for the institutions. They’re happy about it,” said Jeffrey Howard, an executive at OSL, a digital asset and services trading company.

“We’ve seen significant shocks and volatility” in crypto, Treasury Secretary Janet Yellen said when she announced the FSOC report last week. The government is worried about even more devastating shocks if more financial giants ride the crypto wave.

—Benjamin Pimentel (e-mail | twitter)

A MESSAGE FROM THE FIRE EXTERIOR

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