Major U.S. banking trade groups, including the Bank Policy Institute, Association of Global Custodians, and Financial Services Forum, are lobbying the SEC to restrict crypto custody to banks, citing “investor protection.” Their September 18 letter, representing $234 trillion in assets under custody, argues that only banks as “qualified custodians” should hold crypto, dismissing self-custody and crypto-native firms despite their role in driving market innovation. Critics view this as regulatory capture: banks ignoring crypto for years now seek to monopolize custody by imposing barriers competitors cannot meet.
- Banking groups frame themselves as the “gold standard” in custody, despite historically dismissing crypto and relying on a $700B taxpayer bailout in 2008.
- Their letter opposes expanding qualified custodian status to crypto-native trust companies, citing failures like Prime Trust, while ignoring banks’ own systemic risks.
- The strategy mirrors classic regulatory capture, using safety rhetoric, demanding equal treatment that prices out rivals, and offering to help write the rules.
- If regulators side with banks, innovation could be bottlenecked through incumbents; if not, crypto-native firms may gain space to compete on technology and decentralization.
- Outcome will shape whether the next generation of financial infrastructure favors stability through incumbents or innovation through blockchain-native custody solutions.
Major U.S. banking associations are using “investor protection” arguments to block crypto-native competitors from the custody market they once ignored. The nation’s largest banks, which spent years dismissing cryptocurrency as a fad or worse, are now fighting to become the exclusive gatekeepers of the crypto custody market through a coordinated lobbying effort that reveals the classic playbook of regulatory capture in action. The recently passed Genius Act will create winners and losers in the space – and established banks are all in on being the winners.
Banking conglomerates are lobbying hard for control and gatekeeper status of crypto custody. Source: SEC
In a September 18 letter to SEC Chairman Paul Atkins, three major banking trade groups, the Bank Policy Institute, Association of Global Custodians, and Financial Services Forum, paint themselves as the “gold standard” for crypto asset custody while arguing that crypto-native firms and investment advisers should be blocked from self-custody arrangements.
The letter, representing institutions with “$234 trillion” in assets under custody, uses the language of investor protection to advance what appears to be a transparent attempt at market control by incumbents who missed crypto’s early growth.
The “Gold Standard” That Wants No Competition
The banking associations position themselves as uniquely qualified to handle crypto assets, stating: “Custodian banks, as qualified custodians, are widely recognized as the gold standard providers of custody services.” It’s arguable that nobody sees them as that, but nonetheless that’s what they’re saying. They argue their “80+ years” of experience and comprehensive regulatory framework make them indispensable for crypto custody.
Yet the letter reveals a striking contradiction. These same institutions that now claim crypto custody expertise were notably absent during the asset class’s formative years, when regulatory uncertainty and volatility made the market unattractive to risk-averse traditional banks.
“We are unaware, in this respect, of any instance over the past 80 years involving the loss of client assets by a bank custodian,” the letter states, conveniently ignoring that banks had virtually no crypto custody operations until recently, and glossing over the 2008 financial crisis that required a $700 billion taxpayer bailout to prevent systemic bank failures.
Blocking the Competition Through Regulation
The banks’ primary target is clear: preventing crypto-native companies and investment advisers from gaining “qualified custodian” status or offering self-custody services. The letter argues that allowing such arrangements “would eliminate essential protections” and “expose investors to conflicts of interest.”
The associations specifically oppose expanding the definition of qualified custodians to include “state-chartered trust companies unless they are subject to equivalent oversight as banks.” They cite the failures of Prime Trust and Fortress Trust as evidence that “crypto-native custodians” cannot be trusted.
This argument conveniently ignores that requiring crypto firms to meet the same regulatory standards as century-old banks would effectively price most competitors out of the market, precisely the outcome these incumbent institutions likely desire.
The Hypocrisy of “Investor Protection”
The letter’s most revealing section demonstrates the classic regulatory capture strategy: wrapping self-interest in the language of public benefit. The banks argue that “institutional investors, whose participation is essential to the growth of the crypto market, will deploy funds at scale only if they are confident that those assets are safe.”
Yet these same institutional investors have been increasingly moving into crypto through various channels, including many that bypass traditional banks entirely. The argument that institutional adoption depends on bank custody is undermined by the growing success of crypto-native custody solutions and the institutional embrace of self-custody for certain applications.
The letter states: “If the SEC permits crypto firms or investment advisers to provide custody services outside of the existing qualified custodian framework, it is imperative that these custody providers be held to equally rigorous standards.” Translation: if we can’t stop competitors, let’s make compliance so expensive they can’t compete.
Convenient Memory Loss About Innovation
Perhaps most telling is the banks’ attempt to position themselves as crypto innovators. The letter notes that they “welcome the SEC’s leadership in the ongoing development of digital technologies, including the significant improvements the SEC has already made to the ability of banks to engage in the crypto asset market.”
This selective memory ignores years of banking industry hostility toward cryptocurrency. Many major banks prohibited customers from buying crypto, refused to serve crypto businesses, and lobbied against favorable regulation. JPMorgan CEO Jamie Dimon famously called Bitcoin a “fraud” in September 2017, while other banking executives dismissed the entire sector. Even today, JPMorgan continues to block crypto native companies from competing fairly – which has been the focus of the recent dispute with Gemini and the Winklevoss brothers.
Dimon later admitted he regretted those comments, but his initial stance reflected the broader banking industry’s dismissive attitude toward cryptocurrency during its formative years.
Only after crypto’s market capitalization reached into the trillions and institutional demand became undeniable did these same banks pivot to embrace the asset class, and now they want to control it.
The Real Stakes
The banking associations frame their letter as protecting investors, but the true motivation appears to be protecting market share. The letter reveals particular concern about “self-custody” arrangements that would allow investment advisers to hold crypto assets directly, bypassing banks entirely.
“Allowing investment advisers to ‘self-custody’ the assets they manage for their clients… would eliminate essential protections,” the letter argues. Yet this same principle of eliminating intermediaries is fundamental to cryptocurrency’s original value proposition, removing third parties from financial transactions.
The banks seem particularly worried about technological disruption to their traditional (and profitable) role as intermediaries. The letter dismisses any “purported technological advantage that ‘crypto-native’ advisers may have,” arguing that regulatory compliance matters more than technical innovation.
Classic Regulatory Capture Tactics
The strategies outlined in the letter are classic hallmarks of regulatory capture:
Appeal to safety: Claiming only banks can protect investors, despite historical failures.
Equal treatment demands: Insisting that competitors face the same costly requirements that banks already meet.
Systemic risk warnings: Framing competition as a threat to financial stability.
Innovation co-option: Presenting themselves as leaders in digital finance while lobbying to suppress innovation outside their control.
By offering to “assist” the SEC in crafting regulations, the banks are effectively seeking to write the rules in their favor, an approach that has historically allowed incumbents in many industries to entrench their power.
The Larger Implications
This battle extends far beyond custody arrangements. It is part of a broader struggle over who controls the infrastructure of digital assets as they become integral to the global financial system. Similar dynamics can be seen in debates over stablecoin regulation, central bank digital currencies, and exchange oversight, where incumbent financial institutions argue for strict controls that tilt the playing field in their favor.
The stakes are profound. If regulators accept the banking associations’ arguments, the crypto industry could be forced into a model where innovation is bottlenecked through traditional banks, undermining the very ethos of decentralization that gave rise to cryptocurrency. On the other hand, if regulators resist, crypto-native firms may gain the space to compete on technological grounds, offering solutions that better reflect blockchain’s disruptive potential.
Conclusion: A Battle for the Future of Finance
At its core, this is not simply a regulatory dispute, it is a power struggle over who will control the next generation of financial infrastructure. The banks’ claims about investor protection cannot be dismissed outright, as failures among crypto custodians have indeed exposed risks. Yet the coordinated effort to lock competitors out of the market signals something more fundamental: traditional finance now views crypto not as a threat to be eliminated, but as a market to be dominated.
For policymakers, the central question is whether to prioritize incumbent stability or technological innovation. The answer will shape not only the future of crypto custody but also the trajectory of financial markets in the digital age.