While Bitcoin continues to reach new highs, Coinbase, a prominent cryptocurrency exchange, has also reported impressive financial results. These developments seem unrelated to the traditional banking industry, which is primarily involved in custodial services. However, American banks can no longer ignore the growing influence of cryptocurrencies.
During the Chinese New Year, while people were immersed in festive celebrations, the cryptocurrency market remained turbulent. Bitcoin, benefiting from the increased funds brought in by the ETF, reversed its previous downward trend and started to regain its value. On February 14th, Bitcoin surpassed $50,000, reaching a new high since December 2021, and has since fluctuated around $51,000.
Coinbase, a leading cryptocurrency exchange, also released its Q4 financial report, revealing impressive revenue of $954 million and achieving quarterly profitability for the first time in two years. Coinbase’s assets under custody increased to $101 billion by the end of the year, with $70 billion flowing in during the year. The CEO disclosed that Coinbase currently holds 90% of the Bitcoin ETF assets, which amounts to $37 billion. However, this income was not included in the Q4 report, indicating that Coinbase’s custodial revenue will further increase in the 2024 fiscal year.
Coinbase’s revenue is divided into two main categories: trading revenue and subscription and service revenue. While the overall trading revenue decreased due to the market downturn, the subscription and service revenue offset the decline. Coinbase’s Q4 subscription and service revenue reached $375 million, driven by stablecoin revenue, interest income, and blockchain rewards. The total revenue for the year reached $3.1 billion.
The banking industry, which traditionally generates significant income from custodial services, cannot ignore the continuous growth of Bitcoin and the direct institutional benefits it brings. In the past, only specific custodians could provide cryptocurrency custody services, which required complex procedures and approval from national regulatory agencies. Banks were hesitant to enter this field due to risks and the market’s size.
However, the situation changed on July 22, 2020, when the Office of the Comptroller of the Currency (OCC) clarified that national banks and federal savings associations have the legal right to custody cryptocurrency assets. Since then, several banks, including Mellon Bank, have entered the cryptocurrency custody business. Despite this, the regulatory environment tightened after the FTX incident in 2022, and banks became more skeptical of cryptocurrencies.
On February 14, 2023, SEC Chairman Gary Gensler received a letter from banking organizations urging him to modify Staff Accounting Bulletin (SAB) 121, which imposes burdensome requirements on banks providing cryptocurrency custody services. The letter argued that these requirements hinder banks from offering digital asset protection services on a large scale, which could negatively impact investors, clients, and the overall financial system.
Although the SEC maintains that accounting guidance is necessary to address the unique risks and uncertainties associated with cryptocurrencies, there is growing dissatisfaction with SAB 121. The banking industry’s involvement in Bitcoin ETF custody is expected to increase diversity and competition, ultimately benefiting the industry’s development and increasing mainstream adoption of cryptocurrencies.
While it is unlikely that accounting regulations will be adjusted in the near future, banks are eager to participate in Bitcoin ETF custody to gain fees and other potential revenue streams. Despite their previous skepticism, American banks now recognize the importance of cryptocurrencies and are pressuring regulators for more involvement.
In the long run, the involvement of mature banks in the cryptocurrency industry will enhance security, transparency, and reduce custodial costs. Additionally, it will lower the entry barrier for the general public. While there may be short-term profit-seeking motives behind banks’ actions, their participation reflects the changing landscape and the increasing acceptance of Bitcoin as a mainstream asset.