Banks Set to Re-enter Crypto Space in 2025, Driven by Regulatory Shifts

Banks are poised to re-enter the digital asset space in 2025, reversing years of caution due to regulatory and market challenges. The withdrawal of SAB 121 and new guidance from a key federal banking regulator have paved the way for banks to develop crypto strategies, aiming to service clients and maintain competitiveness.

There is a renewed interest from banks of all sizes, from credit unions and community banks to regional players and Wall Street giants. The stakes are high as banks compete for market share among retail and institutional participants seeking to engage in digital assets. Leading banks in this space will be able to differentiate their products and create capital-efficient revenue streams.

Many banks may opt to license custody solutions for in-house use or partner with crypto-native sub-custodians due to cultural and technological reasons. Choosing the right custody partner is crucial, especially given the increasing frequency of cybersecurity incidents. Banks must consider several factors, including time-to-market strategy, regulatory status, security, and the ability to integrate with existing systems.

Time-to-market and regulatory status are critical considerations. Partnering with a regulated custodian that has a comprehensive risk management and compliance infrastructure can streamline a bank's go-to-market strategy. This includes AML and KYC controls, as well as information security policies. Banks and their crypto partners should be on the same regulatory footing to meet expectations and gain the trust of regulators, senior leadership, and clients.

Security and resiliency are paramount for banks entering the crypto space. Banks seek to do so quickly but safely to maintain client trust. A crypto custody partner should employ an end-to-end approach to security, involving multiple lines of defense for every transaction. Robust technology should ensure that every transaction reflects client intent, and assets should be legally separated from those of other clients and the firm to mitigate risk. Custody solutions must also meet stringent operational resiliency standards to scale with the bank’s digital asset business.

Ease of integration into existing systems and the ability to support future product and revenue streams are also important. Integrating crypto custody into core banking systems can optimize revenue opportunities, operational efficiency, and time-to-market. Secure custody serves as the foundation for additional offerings, such as collateralized lending, trading, and staking. As banks look to meet end-client demand for full participation in the digital asset ecosystem, working with a custodian that offers an integrated suite of services is essential.

This year marks a turning point for crypto adoption across traditional banks of all sizes. Crypto-native custody solutions provide a clear path for banks to stay competitive and meet client demand, ensuring they remain relevant in the evolving financial landscape.