From Bank of New York to Citigroup, Wall Street is getting involved in cryptocurrencies

Author: Yueqi Yang; Translator: Block unicorn

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

For now, most of the action involves custody, which is the safekeeping of cryptocurrencies on behalf of investors. State Street Corp., 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 Corp., 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 companies, 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 crypto-focused firms as banks expand key crypto services for big clients. Currently, crypto firms including Coinbase, Anchorage Digital and BitGo dominate the crypto 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 crypto world.

Custody is a behind-the-scenes service, but it’s critical because it’s a springboard for banks to make further inroads into crypto in their institutional businesses like trading and lending, which are the lifeblood of Wall Street banks. Traditional asset managers may also prefer to give custody of crypto assets to banks rather than crypto firms, so their entry into the crypto 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 But in the first week of the Trump administration, the Securities and Exchange Commission rescinded Joe Biden-era accounting guidance that effectively made it too expensive for banks to hold cryptocurrencies to consider.

Federal bank regulators are also overhauling their approach to oversight of cryptocurrencies, having previously scared banks off from the business. The Federal Deposit Insurance Corporation, for example, had 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 advisors, who together 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 firms seek to make more cryptocurrency investments, they will need places to store their cryptocurrencies and companies to help them trade them.

For example, BNY Mellon has seen growing interest in cryptocurrencies from endowments, wealth managers and registered investment advisers who want to custodian their cryptocurrencies with the bank. Carolyn Butler, global head of digital assets at BNY Mellon, said the bank is looking to add more crypto 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). Currently, Coinbase dominates this business. Most of the fund companies that offer the popular bitcoin ETF, including giants such as BlackRock and Franklin Templeton, are using Coinbase to safekeep billions of dollars worth of cryptocurrencies.

Banks could 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 fuels all the other services that are related to custody,” Butler said.

Similarly, State Street aims to offer custody as well as transfer agent 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, starting with custody, in 2026, subject to regulatory approval,” said Donna Milrod, chief product officer at State Street.

Meanwhile, cryptocurrency companies are looking for ways to avoid being completely squeezed out by Wall Street. They believe 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 those operations to cryptocurrency companies. Brett Tejpaul, head of Coinbase Institutional, said in an interview that he is in the middle of two days of intensive meetings this week to talk to 10 U.S. banks.

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

Trading Springboard

Once a bank has a cryptocurrency custody service, it can 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 big clients such as hedge funds. This would put the bank more firmly in the realm of big 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.

Similarly, 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 terms of trading activities compared to providing custody services. An expansion into trading cryptocurrencies directly, while potentially more lucrative than custody, would face more regulatory scrutiny because trading and lending are generally riskier for banks than simply overseeing a client’s crypto.

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 need to decide whether trading cryptocurrencies is the best use of their resources.

To trade cryptocurrencies directly, Goldman needs approval from its primary regulator, the Federal Reserve, according to two people familiar with Goldman’s digital asset plans. It also needs 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.