Today, BNY Mellon CEO Robin Vince published an op-ed in the Financial Times calling for a reset after the recent crypto crisis. Many FT readers may be unaware of critical context: rules are currently being finalized that could severely restrict BNY Mellon’s custodial role in the digital asset sector, primarily for cryptocurrencies, but also tokenized stocks and bonds.

Vince said that we should encourage digital asset innovation, particularly tokenization, while calling for regulations consistent with established rules and principles.

the opinion article

The FT article makes no direct reference to the failed FTX cryptocurrency exchange, but mentions the “consequences of mixed customer assets, poor disclosure and a lack of internal controls.”

For context, BNY Mellon is the world’s largest custodian dealing with $42 trillion in client assets. And the use of third-party custodians generally reduces the risk of mixing.

Suppose that tokenization encompasses conventional assets like stocks, bonds, and real estate. In that case, a large proportion of BNY Mellon’s custodial services could involve taking care of digital assets in five to 10 years.

If the regulations support it.

Vince called for a regulatory framework that allows the financial sector to “prudently embrace” innovation and uphold “basic principles of customer protection, orderly markets and clear regulatory guidelines.”

The piece concludes: “There is a path to be found. We should embrace digital asset innovation and align it with established rules and measured regulatory principles to protect customers and promote resilience. In doing so, we also protect the most precious asset of all: confidence in our financial system.”

The upcoming Basel digital asset rules for banks

The Basel Committee on Banking Supervision has published two draft rules for banks involved in digital assets. It is expected to finalize the rules soon, possibly even this month.

Under the second draft, for a bank like BNY Mellon to custodial cryptocurrency, it would have to set aside a dollar of capital for every dollar of cryptocurrency it custodians. Currently, BNY Mellon’s capital is one-twentieth of one percent of the assets it holds.

Dollar for dollar is prohibitively expensive, which is intentional. It prevents banks from getting involved on a large scale.

Several regulators and central bankers have warned of the risks to financial stability from increased linkages between cryptocurrencies and conventional finance.

In addition to this one-for-one capital requirement, Basel limits cryptocurrency exposures to 1% of Tier 1 capital. Basel’s previous draft did not treat custody as an “exposure” to crypto assets, so these rules do not apply. they applied.

Between the two Basel drafts, in March, the SEC issued a lightning rule requiring all crypto assets held in escrow, including tokenized bonds and stocks, to be kept on the balance sheet.

Just focus on tokenization?

Now you could argue that big banks like BNY Mellon and State Street should focus on tokenized bonds and the like, where the Basel rules impose a much lower (still expensive) markup. However, the technology is the same and there is much more traction in crypto. So if these banks are going to be ready for the tokenization wave, they need experience. That means providing custody services for crypto.

If they are not allowed to get involved on a large scale, then others who are less regulated and less prudent will fill the void. Institutions would prefer to deal with companies like BNY Mellon and State Street. However, non-bank institutions like Nasdaq see this as an opportunity because they are not bound by Basel rules.

Some institutions will only engage in digital assets if they can use their primary custodian, which could slow growth in the cryptocurrency sector if those custodians are restricted.

Isn’t that precisely what the regulators want?

Assuming it is, Basel’s final digital asset rules will likely be strict.