Global banks are rapidly reducing their direct exposure to spot cryptocurrencies, shifting their focus to exchange-traded products (ETPs) instead. The latest data from the Basel Committee on Banking Supervision (BCBS) shows a stark decline in spot crypto holdings among major financial institutions, raising questions about the future of traditional banking’s role in the digital asset space.
Banks Cut Back on Spot Crypto, Favor ETPs
Banks worldwide held approximately 341.5 billion euros ($368.3 billion) in crypto assets under custody during the second quarter of 2024, but only a fraction of that—2.46%—was in direct spot crypto holdings. Instead, institutions have been leaning toward exchange-traded products that track cryptocurrency prices without requiring them to hold the assets directly.
The shift isn’t entirely surprising. After the failures of crypto-friendly banks like Signature Bank and Silicon Valley Bank in 2023, global regulators have been scrutinizing banks’ involvement in digital assets. The BCBS had already recommended in December 2022 that banks should limit their direct exposure to spot crypto to no more than 2% of their total holdings.
Regulatory Pressure and Risk Management Drive the Shift
Financial watchdogs have been laser-focused on preventing excessive exposure to volatile crypto markets. The BCBS survey, which included voluntary and confidential submissions from 176 banks (115 of which are internationally active), highlights a clear preference for regulated financial instruments like ETPs over direct cryptocurrency holdings.
A few key takeaways from the report:
- Only 29 banks accounted for the 341.5 billion euro figure, meaning the majority of financial institutions remain hesitant about crypto involvement.
- Most banks prefer ETPs, which offer exposure to crypto price movements without requiring custody of the actual assets.
- Regulatory scrutiny has intensified, especially after the collapses of key financial institutions tied to the crypto industry.
Institutional Caution Amid Crypto Market Volatility
The crypto market has been anything but stable over the past few years, and banks are responding accordingly. While ETPs provide a more structured way to gain exposure, the near-total avoidance of spot crypto suggests institutions are wary of potential liquidity risks and regulatory challenges.
Even with Bitcoin and Ethereum-backed ETPs gaining traction, banks are treading carefully. The reluctance to hold actual crypto assets underlines a broader industry shift, where traditional finance is engaging with digital assets—but only on highly controlled terms.
What This Means for Crypto’s Place in Traditional Finance
The retreat from direct crypto custody doesn’t necessarily signal a loss of interest in the sector. Instead, it highlights a more risk-averse approach that aligns with existing financial structures. With global regulators keeping a close watch, banks seem determined to minimize exposure while still capitalizing on the growing demand for crypto investment vehicles.
For now, the message is clear: banks are playing it safe, opting for familiar, regulated financial instruments over the uncertainty of direct crypto holdings. Whether this cautious stance changes in the future remains to be seen, but for now, traditional finance is keeping crypto at arm’s length.
