There’s been a reorganization at State Street Digital, the digital assets division at the bank, with the roles transferred to other parts of the company, according to sources that spoke to Bloomberg Law. There were also an unknown number of layoffs. The news follows the issuance of 11 spot Bitcoin ETFs, with not a single one using a bank for custody of the cryptocurrency. That’s partly the result of regulatory hurdles for banks.
At the end of 2023, the State Street Digital division had 100 full-time staff, a relatively small figure given its size – it has $40 trillion in assets under custody.
“In an effort to better deliver our digital expertise and solutions to clients, we have brought together our traditional custody and digital finance in a seamless interoperable customer experience,” State Street said in a statement. “This approach is reducing fragmentation for clients and is making the digital transition as easy as possible for investors. As part of integrating State Street Digital into our traditional custody product group, we have embedded key roles and functions into our broader custody product team.”
In an interview last October, State Street’s Donna Milrod foreshadowed this news when she talked about “bringing digital into the asset servicing product organisation and bringing those two closer together.”
However, the move includes layoffs. And digital asset custody is not booming in U.S. banks for good reason.
The founding leader of State Street Digital was Nadine Chakar, who departed in late 2022. Chakar was the banking industry executive who beat the drum loudest, objecting to the SEC’s Accounting Bulletin 121 (SAB 121) and calling it ‘insane’. Its rules force listed firms that provide digital asset custody to include the figure as both an asset and liability on the balance sheet because of elevated risks. That’s a very unconventional treatment. Usually, assets under custody don’t appear on the balance sheet.
Banks must comply with Basel rules, so because of SAB 121, they must set aside a dollar of assets for every dollar under custody. That makes digital asset custody financially unviable for U.S. banks. A recent BIS report showed banks weren’t major players in digital asset custody globally. But the activity is miniscule in the United States.
The Basel rules do not require digital assets under custody to appear on the balance sheet. Only the SEC rule requires it, so banks in other jurisdictions can provide custody.
The Government Accountability Office (GAO) ruled that the SEC bulletin needed Congressional approval but didn’t go through the process. Multiple legislators wrote to the Federal Reserve and other banking regulators asking them to ignore the bulletin. But until there is a definitive response, banks won’t take on billions in custody.
The lost Bitcoin ETF opportunity
With the launch of 11 Bitcoin ETFs this month, a major opportunity for bank custodians has passed.
BNY Mellon, the world’s largest custodian has a digital asset custody solution in production. Instead, most of the ETFs used Coinbase except Fidelity, which has its own custody subsidiary and Van Eck, which used Gemini.
That’s not to say banks weren’t involved. State Street’s statement said it is “serving three of the newly approved Bitcoin ETFs with custody of cash, fund accounting, transfer agency, ETF basket services and electronic ETF order-taking.” However, those are conventional services rather than digital asset custody.
In a Coindesk opinion piece this week, ex-BNY Mellon technologist David Schwed highlighted that BNY Mellon has roughly 1,000 of its 50,000 staff focused on security. Coinbase has around 5,000 staff in total. “Real oversight requires redundancy that these new institutions may struggle to provide at a level appropriate for securing tens of billions of dollars in bearer instruments,” he wrote.
State Street Digital was due to launch its digital asset custody solution early this year. It previously partnered with custody firm Copper but split from them last year. With the spot Bitcoin ETFs now live, the urgency to launch has passed until the regulatory environment is clarified.
It’s not the first time the regulatory environment has blocked institutional involvement in custody. Some banks paused plans in 2022 because of SAB 121. In July last year, Nasdaq shelved its plans to launch a digital asset custody solution, citing regulatory uncertainty.
Update: added State Street’s statement