Bank of New York Mellon Identified as First Bank to Receive SEC Exemption From SAB 121

During a public hearing Monday in Wyoming, BNY was named as the bank that received an exemption from the SEC’s onerous rules for custodying digital assets

In what would be a huge breakthrough for banks looking to dive into the institutional crypto custody business, Bank of New York Mellon (BNY), America’s largest custodian bank, was identified during public testimony in Wyoming’s Select Committee on Blockchain, Financial Technology, and Digital Innovation Technology as having received a “variance” from following the SEC’s SAB 121 accounting guidelines for its institutional crypto custody business. 

As part of a broader federal update on Monday, Chris Land, general counsel for U.S. Senator Cynthia Lummis (R-WY), testified that the SEC and thus likely other regulators have cleared the way for BNY to provide institutional custody of digital assets.

“Bank of New York Mellon is looking to get more involved in the crypto custody business,” Land testified. “They had some problems with Staff Accounting Bulletin (SAB) 121, and the SEC has apparently given them some kind of variance from SAB 121 to move forward.” Land provided this update in the context of the potential impact to Wyoming’s Special Purpose Depository Insurance (SPDI) bank charter held by companies such as Custodia and Kraken.  

Read more: In the Ongoing SAB 121 Fight, Here’s How Crypto Can Move Forward With Bipartisan Support

SEC Reveals SAB 121 Exemptions For Crypto Custody

Last Monday, SEC Chief Accountant Paul Munter gave a speech in which he surprisingly revealed that the agency had granted some exemptions to SAB 121, mostly finding that the rule did not apply to certain entities if they met certain conditions. Munter said one exemption had been granted to a bank, several brokerage houses, and other entities that use blockchains to track and transfer traditional financial assets, without specifying the names of any of them. 

SAB 121 requires that entities who choose to custody crypto list the assets on their balance sheet and create a corresponding liability equal to the worth of the crypto. (Though it is technically guidance, the General Accounting Office determined that it was a rule.) The crypto and banking industries have strongly criticized this measure as overly burdensome to comply with.

In his speech, Munter outlined situations in which the SEC found SAB 121 did not apply for a bank, brokerage house, or other entities that use blockchains. In the case of the bank, he said, the conditions involved the institution working with a state regulator first to ensure that the crypto assets being custodied would return to the customer in the event of a bankruptcy, and that activity with customers would only comprise institutional custody with sufficient controls in place to manage risk.

Read more: President Biden Vetoes SAB 121 Repeal

How Other Regulators View BNY’s Potential Crypto Activity 

BNY is located in New York and is supervised by the New York Department of Financial Services (NYDFS), and at the federal level, its prudential banking regulator is the Federal Reserve.

In his testimony, Land described how the Federal Reserve was part and parcel to this SAB 121 exemption, saying, “As the Fed regulates Bank of New York Mellon’s bank holding company, [the Fed] would have had to have given their non-objection under the current legal requirements and guidance to Bank of New York Mellon getting into the digital asset custody business.”   

However, it’s not clear if the Fed would have had to give a non-objection letter. Two Fed supervisory letters in 2022 and 2023 do not explicitly say an approval is needed first to engage in crypto custody. The two supervisory letters are SR 22-6, which requires that crypto-asset activity be legally permissible, and SR 23-7, which indicates crypto custody is within the scope of the Fed’s supervisory program for crypto. 

However, a rule specifically for state banks like BNY indicates that such approval would be necessary. Policy statement 9(13) issued by the Fed does suggest state banks need to follow rules that apply to national banks. The Federal Register says, as an example, that if the Office of the Comptroller of the Currency (OCC) requires a national bank to receive a non-objection letter before engaging in a particular activity, then a state bank would need to obtain the same type of letter, but from the Federal Reserve. (And the OCC does require that banks obtain non-objection letters before they can engage in crypto asset custody.)

Chair Cyrus Western of Wyoming’s Select Committee on Blockchain raised the question to Land as to whether BNY would need to obtain New York’s BitLicense. Land said BNY would likely argue banking laws provide federal pre-emption, meaning the BitLicense would not apply. 

BNY declined to comment on the matter. A spokesperson for the SEC declined to comment on any individual entity, but did point to the speech by Munter on SAB 121. The Federal Reserve declined to comment, and New York’s DFS did not respond to multiple requests for comment on the matter. 

Michael Novogratz, CEO of Galaxy Digital, speculated last week on Fox Business that the bank the SEC had exempted from SAB 121’s requirement was likely BNY, and that the exemptions should allow more traditional banks to start participating in crypto. On Sept. 8, BNY CEO and President Robin Vince appeared on a Yahoo Finance podcast titled “How a Bank Founded By Alexander Hamilton Is Prepping For Crypto” in which he provided some of his perspectives on the burgeoning digital asset industry. 

An Unfair Playing Field?

Following Land’s testimony on Monday, Western of the Wyoming Select Committee told Unchained that the SAB 121 exemption apparently provided by the SEC to BNY “shows that those double standards are getting worse and worse and not better, which …, from a state perspective [is] incredibly frustrating. And we’re really disappointed by it.”

“Folks like Custodia, Kraken, Bankwyze who have played by the rules this entire time, who want to be good corporate citizens, who want to pay taxes, who want to create jobs, they’re just kind of getting stuffed in the corner, being ignored while clearly there is a game favorite [BNY],” said Western, referring to instances such as how Custodia was not granted a master account at the Fed—a key competitive disadvantage which Custodia has sued the Fed over. 

Read more: Trump Has Made Promises to Crypto Voters. If He’s Elected, What Could He Actually Do?