From New York Bank to Citibank, Wall Street began to get involved in the cryptocurrency space

Article author: Yueqi Yang

Article translation: Block unicorn

Some large U.S. banks are forcing strongly into the cryptocurrency services sector for large funds, investors and traders, taking advantage of the rapid relaxation of regulatory policies under President Donald Trump to launch a digital asset version of their long-running business.

Currently, most of the actions involve custody, which means investors keeping cryptocurrencies. An executive at State Street Bank, one of the world's largest stock and bond custody banks, said the bank plans to launch a digital asset custody service next year. Meanwhile, State Street's top rival, Bank of New York Mellon, has already launched a small-scale custody business for Bitcoin and Ethereum, but plans to expand it to more types of tokens.

Citibank, which ranks third in the U.S. in terms of asset size, is also exploring the addition of cryptocurrency custody services through self-built and cooperation with external companies, people familiar with the bank said.

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

Overall, these plans may represent a reshuffle of power between Wall Street and cryptocurrency-focused companies as banks expand key cryptocurrency services for big customers. Currently, cryptocurrency companies including Coinbase, Anchorage Digital and BitGo dominate the cryptocurrency custody space, while Galaxy Digital, FalconX and Hidden Road provide trading services for large investors and traders, essentially making them crypto Wall Street in the world of currency.

Custody is a behind-the-scenes service, but it is crucial because it is a springboard for banks to further enter cryptocurrencies in institutional businesses such as transactions and loans, which are the lifeblood of Wall Street banks. Traditional asset management companies may also prefer to escrow crypto assets to banks rather than cryptocurrency companies, so their entry into the cryptocurrency space depends on the bank’s ability to provide custody services.

Until recently, banks were mostly reluctant to deal with cryptocurrencies directly due to regulatory hurdles and the risks of this volatile and relatively new asset class. But in the first week of the Trump administration, the SEC revoked the Joe Biden-era accounting guidance that actually made it too expensive for banks to hold cryptocurrencies to consider.

Federal banking regulators are also revolutionizing their way of regulating cryptocurrencies, after they scared banks from doing the business. For example, Federal Deposit Insurance Corporation has warned of the risks of cryptocurrencies to the entire banking system, but is now opening the way for banks to participate in more cryptocurrency activities.

The cryptocurrency industry is closely following the plans of Bank of America as they may bring money to the cryptocurrency market from major clients such as hedge funds, mutual fund companies, endowments, wealth management companies and financial advisors who jointly manage the trillions of dollars in funding.

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

For example, the Bank of New York Mellon has seen an increasing number of endowments, wealth management companies and registered investment advisors who want to escrow cryptocurrencies to banks. Caroline Butler, global head of digital assets at Bank of New York Mellon, said the bank is seeking to add more cryptocurrency custodial customers in a “controlled way.”

The bank is also exploring custody services for asset management companies that issue bitcoin and other cryptocurrency exchange-traded funds (ETFs). Currently, Coinbase is dominating the business. Most fund companies that offer popular Bitcoin ETFs, including giants like BlackRock and Franklin Templeton, are using Coinbase to keep billions of dollars worth of cryptocurrencies.

Banks can also use custody services to enter another popular cryptocurrency sector: tokenization, or put assets such as bonds on the blockchain. Bank of New York Mellon is considering using custody services to support tokenized assets such as money market funds. “It powers all other services related to hosting,” Butler said.

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

“Our plan is to provide these services to customers in phases in 2026, starting with custody and requiring regulatory approval,” said Donna Millrod, chief product officer of State Street.

Meanwhile, cryptocurrency companies are looking for ways to avoid being completely squeezed out of the market by Wall Street. They believe that many banks will want to work with cryptocurrency companies at least initially to build infrastructure or outsourcing services.

Coinbase, the largest cryptocurrency exchange in the United States, wrote a letter 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 businesses to cryptocurrency companies. In an interview, Coinbase Institutional head Brett Teger Paul said he was in an intensive two-day meeting this week to negotiate with 10 U.S. banks.

However, product launches from many large banks will not be immediately realized. State Street, for example, still needs Fed approval to launch digital asset custody services in the U.S., Milrod said.

Trading Springboard

Once banks have cryptocurrency custody services, they can pave the way for the launch of more services, such as cryptocurrency trading and loans, as well as major brokerage businesses, a range of trading and other services for major clients such as hedge funds. This will allow banks to enter the realm of large cryptocurrency companies more securely.

Trading giant Goldman Sachs caused a sensation when it launched its cryptocurrency trading division in 2021, but the bank still does not trade cryptocurrencies directly. Instead, it trades cryptocurrency derivatives that settle in cash only, not actual cryptocurrencies, as well as CME-listed Bitcoin and Ethereum futures.

Likewise, Citibank trades CME Bitcoin futures only as a proxy, meaning it facilitates customer transactions but does not use its own capital, according to a spokesperson for the bank.

But banks still have a long way to go when it comes to trading activities than providing custody services. The expansion of direct transactions of cryptocurrencies, while likely to be more profitable than custody, will face more regulatory scrutiny, as transactions and loans are often more risky for banks than simply monitoring their clients’ cryptocurrencies.

And, just because banks are allowed to do something doesn't mean they will do it - cryptocurrencies' volatility can make it expensive to meet the strict regulatory capital requirements faced by large banks, and banks need to decide whether trading cryptocurrencies are The best way to use its resources.

To trade cryptocurrencies directly, Goldman Sachs needs approval from its main regulator, the Federal Reserve, according to two people familiar with Goldman Sachs’ digital asset plan. It also requires BitLicense from the New York State Department of Financial Services to provide cryptocurrency services in New York.

Goldman Sachs will also assess whether entering spot cryptocurrency trading is commercially significant, one of the people said. A Goldman Sachs spokesman declined to comment.