Banks lagging behind crypto integration risk competition from tech-focused financial institutions

In the past year, the pace of institutional crypto adoption has shifted from sporadic announcements to an ordered rollout. What was once framed as an all-or-nothing leap is now being executed step by step, following a phased framework that guides banks from passive exposure to fully integrated on-chain services.

A new Chainalysis model breaks this progression into five distinct levels of maturity, each tied to specific activities, gating factors, and revenue streams.

In 2025, this roadmap is proving increasingly useful for banks building strategy and market participants tracking which institutions are best positioned to capture wallet share in digital assets.

The crypto landscape today looks nothing like it did during the initial waves of institutional curiosity in 2020 and 2021.

Banks are no longer asking whether crypto will matter; they are deciding how deeply and how quickly to integrate it into their existing businesses.

The maturity ladder outlined by Chainalysis offers a pragmatic way to break through internal hesitation, set milestones, and build a defensible, revenue-generating crypto strategy that adapts to evolving regulations rather than being paralyzed by them.

The ladder ranges from Level 0 to Level 4, with banks lagging far behind some major TradFi financial institutions.

Next, we’ll break down each layer and identify which companies sit within each boundary.

The maturity ladder begins with Level 0, where banks take inventory of indirect exposure, allocate internal champions, and start training on crypto-native compliance tools.

This planning phase, focused on internal education, ecosystem mapping, and vendor assessment, now includes various low-cost resources ranging from Discord communities to structured Chainalysis sessions.

Although Level 0 lacks direct revenue impact, it’s the foundation for what comes next, especially in markets where regulators have made it clear that crypto will be subject to existing banking rules rather than excluded from them.

Even banks that believe they have little crypto involvement often discover that exposure exists through customer activity. Retail clients may be funding exchange accounts, companies may be paying suppliers via stablecoins, and treasury desks may already be interacting with tokenized securities without formal policies in place.

Understanding these links is crucial for risk management, but it also reveals immediate service gaps banks can close by moving to Level 1.

Level 1 marks the point where banks start operationalizing crypto, often in response to client demand rather than top-down strategy.

This includes offering retail FX and treasury services to companies that interact with crypto platforms, or allowing banked users to move funds to and from exchanges without friction. In the US, regional institutions like BankProv have embraced this level by opening accounts for crypto-native businesses, while European digital banks like Monzo or N26 allow seamless movement between fiat and regulated exchange partners.

These activities generate fee income from FX spreads, corporate payments, and deposit management, without requiring banks to hold crypto on their balance sheets.

The competitive pressure at Level 1 is intensifying. Banks that hesitate risk losing even traditional client relationships to competitors offering faster fiat-crypto interfaces, better treasury services for crypto companies, or more flexible business banking terms.

Crypto exposure at this stage is largely manageable through existing AML frameworks, making Level 1 a logical low-risk entry point for most institutions.

The real acceleration came with the launch of spot crypto exchange-traded products (ETPs) in 2024, which effectively moved the market into Level 2. With the approval of vehicles like IBIT, FBTC, and later VanEck’s ETH ETP, banks gained a ready-made way to offer clients exposure to Bitcoin and Ethereum without managing wallets or custody themselves.

Distribution of these products has now become a key differentiator for wealth managers and private banks, especially those who were already selling gold ETFs or structured notes.

The speed of ETP adoption was instructive. Within six months of launch, spot Bitcoin ETFs in the US amassed more than $50 billion in AUM, pulling in investors ranging from institutional allocators to individual retirement accounts.

VanEck and Ark Investment Management’s ETH ETPs demonstrated that client appetite was not confined to Bitcoin alone. Solana, Avalanche, and other Layer-1 blockchain assets are already being considered for future ETPs, setting the stage for broader diversification.

By May 2025, spot Bitcoin ETPs had accumulated over $65 billion in assets under management, validating the commercial scale of synthetic exposure.

For banks, ETPs offer fee-based revenue with minimal operational complexity and let them begin marketing crypto solutions before building backend infrastructure. Importantly, offering ETP access often catalyzes cross-selling opportunities into custody and trading once clients become more comfortable with digital assets.

At Level 2, banks face product strategy choices. They can simply distribute third-party ETPs or build proprietary structured notes that package crypto exposure with downside protection or yield enhancement.

Institutions that move aggressively into Level 2 already see stronger client retention rates among younger, crypto-aware wealth management clients.

Level 3, enabling crypto deposits and providing custody, requires a deeper operational commitment. Here, institutions allow clients to hold digital assets directly and rely on regulated custodians for key management and security.

BNY Mellon’s launch of institutional custody services in partnership with Fireblocks and Chainalysis marked a clear inflection point. Rather than building in-house wallet software or cold storage protocols, BNY leveraged Fireblocks’ infrastructure to handle safekeeping and used Chainalysis’ KYT product for continuous on-chain monitoring.

Standard Chartered’s Zodia Custody unit followed a similar blueprint, demonstrating that major institutions can achieve regulated, scalable custody offerings with manageable capex and timelines.

Across the market, most Level 3 players are taking a “build through partnerships” approach, minimizing the risks of technology debt and allowing faster regulatory compliance.

While fewer than a dozen global banks have entered Level 3, those that have now control a growing slice of institutional flow, especially from hedge funds, family offices, and corporate treasuries seeking secure, regulated storage. Crypto custody is no longer a niche back-office function—it is emerging as a new prime brokerage vertical, with bundled lending, trading, and staking services extending the custody relationship far beyond safekeeping.

The competitive advantage for banks operating at Level 3 is clear. They not only defend existing client relationships from crypto-native competitors but also expand into servicing the next generation of digitally-native capital allocators.

Custody-ready banks position themselves at the crossroads of flows between DeFi protocols, tokenized assets, and traditional markets.

Once digital assets are custodied, banks can unlock a range of advanced services (DeFi lending, stablecoin payments, tokenized asset issuance) that define Level 4.

Though still niche, these activities are no longer theoretical. In 2025, Fidelity began allowing select clients to use Bitcoin as collateral for DeFi-based loans.

Swiss-based SEBA Bank partnered with DeFi Technologies to create tokenized structured products, blending traditional fixed income structures with blockchain settlement efficiency.

Visa’s USDC merchant settlement expansion demonstrates the growing real-world demand for stablecoin-based instant payments.

JPMorgan’s JPM Coin, previously confined to internal experiments, is now facilitating repo transactions and cross-border commercial payments, offering real-time settlement advantages that legacy wire systems cannot match.

Banks at Level 4 not only handle crypto but also build entirely new financial rails that will underpin tokenized securities, programmable payments, and automated liquidity management. The margins in these businesses may ultimately rival or exceed traditional custody and FX revenues.

However, Level 4 is also the most operationally demanding stage. Banks must manage smart-contract risk, adjust risk-weighting models for digital assets, and build compliance protocols for blockchain-based transactions that look very different from traditional money movement.

Institutions succeeding here are forming specialized internal crypto product teams, borrowing talent from fintechs, and partnering with auditors experienced in DeFi architecture.

Globally, the progression across these levels is shaped less by technology than by jurisdictional policy. In the US, the repeal of SAB 121 is opening the door to broader custody adoption, even as regulatory clarity around staking, DeFi, and token issuance remains limited. Banks operating in the US still face uncertainty around stablecoin regulation and the treatment of tokenized securities under existing securities laws.

In Europe, the MiCA framework enables cross-border distribution of ETPs and establishes standardized licensing for custodians. Banks can now passport crypto services across the European Union, creating economies of scale that favor early movers.

Through its Financial Conduct Authority’s regulatory sandbox and Bank of England tokenized bond initiatives, the UK is positioning London as a hub for both digital assets and tokenized traditional finance.

In Asia, Singapore’s MAS and Hong Kong’s Securities and Futures Commission have introduced licensing regimes that create clear paths for crypto custody and exchange businesses. Banks in these regions are moving quickly into Level 3 activities, often through joint ventures or minority investments in regulated crypto startups.

Middle Eastern financial centers like Abu Dhabi are aggressively courting DeFi and tokenization projects, potentially leapfrogging Western markets on Level 4 use cases.

The result is an increasingly fractured landscape, where banks operating globally must tailor crypto strategies not only by client segment but also by jurisdiction.

Partnerships have emerged as a consistent theme across the maturity ladder. Rather than building everything in-house, most banks are leaning on crypto-native infrastructure providers.

This has allowed them to shortcut development timelines and focus on client servicing rather than cold storage engineering or blockchain node operations.

Fireblocks, Anchorage, Zodia, and Metaco have become critical providers underpinning custody expansion. On the payments side, Circle’s USDC platform, Visa’s stablecoin APIs, and Stellar’s on-chain payment protocols are allowing banks to deploy programmable payments without reinventing settlement architecture.

Third-party risk assessment firms are essential for Level 4 services like DeFi collateralization or tokenized asset issuance. Banks are also beginning to hire in-house blockchain forensic specialists and smart-contract auditors, blending traditional compliance staffing models with crypto-specific skill sets.

The trend is clear: success in crypto banking is becoming less about in-house coding and more about ecosystem orchestration and risk-managed vendor integration.

While the framework is still new, it offers a clear lens through which to assess which institutions are ahead and which risk falling behind. A rough industry map places over 200 banks in Level 0, 80 to 100 in Level 1, around 25 in Level 2, and fewer than 15 in Level 3. Only a handful, Fidelity, Visa, and SEBA, have entered Level 4.

Banks that are still hesitating at Level 0 and 1 are risking customer attrition. The wealthiest clients are already seeking crypto exposure through external platforms or private funds. Corporate treasuries seeking stablecoin settlement solutions will not wait indefinitely. Institutions that delay may find themselves disintermediated across retail, wealth, and corporate lines simultaneously.

Conversely, early movers are building defensive moats. They are embedding crypto services deeply into core client relationships, creating switching costs that will be difficult for late adopters to overcome, even if they eventually catch up on technology.

The implications of this maturity ladder go beyond adoption timelines. It also helps frame the policy conversation. Policymakers can use the framework to tailor regulations to each level, focusing conduct rules on Level 1, product disclosures on Level 2, capital treatment on Level 3, and smart-contract risk on Level 4.

For investors and market watchers, the framework provides a structured way to track institutional progress, anticipate market share shifts, and understand how traditional financial infrastructure is being retooled in real time.

As new ETPs emerge (potentially tied to Solana, real-world assets, or tokenized money-market funds), the threshold to move from Level 2 to Level 3 will continue to lower.

With programmable stablecoin rails growing rapidly, Level 4 may soon become as commercially viable as custody. In that context, the key takeaway from Chainalysis’s framework is how banks enter crypto and build sustainable, compliant businesses at each step of the way.