Forget Coinbase. Banks May Win US Crypto Custody Race

In this edition of the Bloomberg Crypto newsletter,  predicts who the big winners will befrom the SEC’s new crypto custody proposals: 

Battle for custody

Crypto’s been getting a pretty bad rap from US regulators in recent weeks, with the Securities and Exchange Commission targeting the sector in a slew of enforcement actions and outlining proposed new rules for safeguarding digital assets. Unfortunately for the young upstarts who are trying to reinvent finance, it’s the Wall Street old guard and their fintech friends that are likely to end up winners when it comes to custody.

In the wake of FTX’s collapse, the industry is learning some hard lessons. Namely, it’s no longer good enough just to say that you’re segregating client assets from exchange funds, or that your books are getting regular independent audits — you have to be able to file the paperwork to prove it. That’s what the SEC is now asking of any US firm looking to custody crypto, as Chair Gary Gensler seeks to close the gap between the digital Wild West and Wall Street. 

Some crypto companies, like Coinbase Global Inc.Gemini Trust Co., think they already meet those requirements, and they might be right. For Coinbase, which reported a $557 million quarterly loss after the bell Tuesday, custody is set to be a big breadwinner as trading fees diminish. But until the new rules are finalized, there’s only one surefire bet for the crown and that’s the banks themselves — or at least, the bank-adjacent. 

Several of old-school finance’s biggest names including Brevan Howard Asset Management, State Street and Standard Chartered currently own, invest in or hold major partnerships with crypto custodians like PolySign’s Standard Custody, Copper Technologies Ltd. and Zodia Custody. Those firms in turn get the best of both worlds from the arrangement: an enhanced reputation (by association) that can reduce counterparty risk for clients, and the distance to be technologically nimble in a way that banks can’t.

To be sure, these efforts are still in their infancy, and for some the runway that’s left to reach the size of a COINBASE or Gemini is huge. But it’s not insurmountable. 

Executives at the bank-backed firms that I spoke to this week said the traditional firms that are considering getting into digital assets — and there are quite a few of them — basically have two options in the face of the SEC’s current attitude toward crypto-native companies: Build it yourself, or acquire someone who can. Neither is a barrier to entry. 

Charting it out

Counting it out

Hearing them out

What we’re reading (and writing)

• Binance Considers Pulling Back From US Partners as Crypto Crackdown Escalates
• ‘Effective Altruism’ Led Bankman-Fried to a Little-Known Wall Street Firm (New York Times) 
• Bitcoin Will Be Fine With Monkey JPEGs, Creator of NFT Protocol Says
• Hundreds of Fake ChatGPT Tokens Are Luring Crypto Punters (CoinDesk)
• Hong Kong’s Crypto Hub Ambitions Win Quiet Backing From Beijing
• Fear Made John McAfee Rich. It Also Ruined Him (Bloomberg Businessweek)

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— With assistance by David Pan