Crypto Custody Battle

US regulators have been cracking down on the cryptocurrency market for the past few weeks. The US Securities and Exchange Commission (SEC) has been at the forefront of the regulatory crackdown, which is already putting pressure on crypto firms. While giant crypto exchanges like Binance have announced plans to scale down US operations, Wall Street is using the opportunity to scoop a share of the crypto custody market.

SEC cracks down on crypto firms

The collapse of the FTX exchange increased regulatory attention to the cryptocurrency industry. The SEC has been targeting the sector to protect investors and ensure another situation like that of FTX does not happen again.

Kraken is one of the crypto firms that are on the receiving end of the SEC regulatory crackdown. The exchange was forced to halt crypto staking services in the US and paid a $30M fine to the SEC. The situation raised criticism from Kraken’s CEO, Jesse Powell, who has accused the SEC of shutting down firms seeking to offer crypto custody services.

“Why does separating the custodian from the exchange better protect you from the custodian? “ Powell questioned.

Coinbase is currently the largest exchange in the US. The exchange became a publicly listed firm in 2021, with its shares trading in tandem with crypto prices. Coinbase believes that it has met the SEC requirements to custody crypto, but after reporting a $557 million quarterly loss and a $2.62 billion annual loss for 2022, user confidence might be diminishing.

Crypto exchanges generate most of their revenues from trading fees. However, if these trading fees start diminishing, these exchanges are forced to look for new avenues to raise their revenues. Crypto custody is a service that exchanges are exploring, but with the SEC crackdown, it appears Wall Street could emerge at the top.

Wall Street could dominate crypto custody

A report by Bloomberg has said that banking institutions are showing interest in crypto custody services. Some of the largest traditional banking institutions have ventured into the crypto custody business through strategic acquisitions.

Brevan Howard Asset Management, State Street, and Standard Chartered banks have already shown interest in crypto custody services. These banks have already invested in some firms offering crypto custody services.

By holding partnerships in crypto custody platforms such as Zodia Custody, Copper technologies Ltd and PolySign’s Standard Custody, these banks can get the best out of the traditional finance and crypto worlds. Traditional banks can lower the counterparty risks for their clients, while the acquired crypto firms will offer technological capability.

The Bloomberg report noted that the executives at the companies acquired by these traditional banks were exploring ways they could venture into the digital assets industry. These banks are venturing into crypto custody, which they could dominate as nascent crypto firms could be inhibited from offering these services.

Therefore, in a way, the SEC is helping Wall Street scoop a significant share of the fast-growing crypto market. Several Wall Street banks have already rolled out crypto trading services for their clients, citing increased demand.


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