The Crypto Credibility Gap

Good morning and welcome to Global Custody Pro. Today we’re going to examine the credibility problem faced by the digital asset industry and explore what challenges institutions need to address before digital assets achieve mainstream status. The regulatory environment faced by digital assets is different in every country, and until that is standardised and aligned to global standards on financial markets infrastructures, there will continue to be major challenges to institutional adoption.

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Key Takeaways

• Regulatory clarity alone is insufficient to resolve digital assets’ credibility issues; trust, security, and transparency remain critical.

• Institutional investors need clear, globally harmonized regulatory frameworks to confidently integrate digital assets into their portfolios.

• Operational risks in digital assets remain high due to comparatively weaker infrastructure, financial controls, and balance sheets relative to traditional finance.

• Insurance products tailored for digital assets are evolving but currently lack comprehensiveness and cost-efficiency, posing challenges for asset protection.

• Attracting and developing talent with hybrid expertise in blockchain technology and traditional finance is essential to drive industry maturity.

• Addressing and rectifying past industry failures is crucial for achieving widespread institutional adoption and unlocking the full economic potential of digital assets.

A Shift In Regulatory Climate?

Since Donald Trump took office, the United States has experienced a significant easing in its regulatory approach. Many regulatory investigations have been halted, and new executive orders and agency practices signal an effort to make the U.S. the preferred jurisdiction for digital assets worldwide.

This is a clear change from the previous administration's approach to digital asset enforcement at the SEC and other regulatory agencies such as the OCC, FDIC, Federal Reserve, and CFTC.

This posture change is only the beginning. A significant credibility gap remains for digital assets, largely due to years of fraud and the exploitation of retail investors. Without restored trust, public participation will be limited even as the regulatory framework improves. A possible future scenario is that retail flows and institutional flows focus on exchange-traded products almost exclusively to reduce risk exposure.

A more urgent challenge is understanding the direction institutional investors will take with digital assets going forward. The digital asset space is littered with the remnants of failed projects, careers, and investments. These past losses have led to job cuts, resignations, and a cautious approach among boards and investment committees. Overcoming this legacy of failure is essential before the sector can fully capitalize on its economic potential.

Institutions Prioritise Risk Management

A retail investor uses their own money. If they make a serious mistake and get scammed, they lose money and stop trading (hopefully). An institutional investor uses other people’s money. If they make a serious mistake, they could end up facing criminal prosecution and potential jail time or severe financial penalties.

Institutions care deeply about risk. For institutions, risk encompasses reputation, trust, competence, and overall capability. Each of these risks and how they are managed impacts business operations and public perception of the board and management.

The key requirements for institutional digital asset adoption aren’t limited to clear regulatory settings. Clear regulatory settings are the bare bones skeleton required to build a business servicing digital assets that is ready to service institutions.

Traditional financial infrastructure regulations, standards, and reporting lack clear parallels in digital assets. This gap arises because distributed ledger technology changes roles and responsibilities across trade lifecycles. If there is atomic settlement, what is the role of a clearinghouse? If there is a distributed ledger recording ownership, does that make it a new Central Securities Depository?

One under-discussed risk is that U.S. regulatory changes alone are insufficient to support global institutional adoption. Global financial institutions operate in every major market. There is a risk that gaps between how the US chooses to regulate digital assets and how other countries choose to regulate digital assets causes a gap where non-US institutions lag behind any progress made by the US institutions. However, EU MiCAR regulation is already seeing several leading institutions launch initiatives to expand digital asset custody.

In the global custodian space, consider BNY’s approach, one of the largest global custodians, describes its digital asset platform in its 2024 annual report. It says openly it is “de minimis”. What this means is that the asset class for arguably the most advanced global custodian in this space is still very tiny. Their focus on servicing the needs of exchange-traded products likely reflects a focus on servicing institutional customers with a lot more control than some crypto advocates might appreciate.

In order for asset managers to be able to integrate digital assets into their portfolios, the entire operating model of their custodian has to have all the integration points designed, developed, tested, deployed, and all of this needs to happen inside the standard control framework of the bank.

The main challenge for institutions in this space is that the operational risks faced in day-to-day tasks involving digital assets are significantly higher, including transaction security, counterparty reliability, and fraud risks.

Unlike traditional finance, many digital asset scenarios offer no automatic protection, significantly elevating operational risk. And the reputation risks from any such losses would be unbearable to many boards of directors when it comes to setting the risk appetite for the organisation. This means that operating models at big institutions will be implemented with many layers of controls and risk mitigants.

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The Regulation Supertanker Must Align Globally

The regulatory landscape for cryptocurrencies consistently trails behind the technology's rapid evolution. Policymaking moves slowly, often struggling to keep pace with technological advancements. Rapid regulatory shifts in the United States, for instance, create significant challenges, as firms must quickly adapt to new requirements.

Globally, financial crime prevention has become a primary regulatory focus within the crypto industry. Authorities around the world are increasingly vigilant about illicit finance risks, trying to apply traditional banking measures such as Anti-Money Laundering (AML) and Know-Your-Customer (KYC) protocols to digital asset platforms. Consequently, crypto companies have faced substantial penalties for compliance breaches in recent years.

However, it's important to recognize that a swift regulatory change in the United States doesn't mean every other country will follow suit immediately or at the same speed. Regulatory frameworks will continue to evolve differently across jurisdictions, reflecting each nation's unique priorities and processes.

Digital Asset Insurance Has Limitations

The crypto world faces major security challenges, with billions lost to hacks and fraud schemes in recent years. Unlike traditional banks, crypto platforms typically offer no automatic protection when things go wrong—users who lose assets often have no way to recover them.

This places enormous responsibility on exchanges, wallet providers, and DeFi platforms to strengthen their security measures through smart contract audits and better key management. Traditional banking addresses similar concerns through regulatory capital requirements, where banks must set aside specific reserves to cover operational risks. The crypto industry's lack of comparable protections continues to discourage participation from institutions and cautious users who expect stronger safeguards for their assets.

Although insurance solutions are appearing, they still only partially address digital asset security concerns. Specialized insurers now offer policies that protect against risks like exchange hacks and theft, though these products remain limited and expensive compared to traditional financial protections.

This situation is gradually improving as insurers develop better methods to assess blockchain-related risks. The potential impact is significant—just as deposit insurance transformed public confidence in banking, comprehensive crypto insurance could reassure hesitant participants. As insurance options become more available and affordable, and as security standards mature, the industry may finally overcome one of its biggest obstacles to broader adoption and trust.

There is an argument to be made that SAB 121 - which forced banks to hold digital assets in custody on their own balance sheet thus making it impossible to service that business - was partly an attempt on the part of regulators to say “Hey, look bankers, we don’t think you can manage these risks yet”.

The Talent Gap In Digital Assets

The crypto industry faces challenges attracting skilled professionals due to competition from established technology and finance sectors. Although digital assets intrigue many talented individuals, they often prefer the stability offered by traditional firms or other innovative fields such as artificial intelligence, especially when crypto faces credibility issues like scandals or uncertain regulations.

Global custodians involved in digital assets require unique expertise, combining deep knowledge of blockchain technology and traditional financial custody practices. Professionals in this space must effectively bridge decentralized blockchain systems with existing financial infrastructures, managing regulatory compliance across various jurisdictions, sophisticated security protocols, and the complexities of blockchain networks.

The success of institutional adoption of digital assets largely depends on custodial services, raising questions about how quickly traditional institutions will develop internal digital asset platforms if asset owner demand grows under clearer regulations.

Attracting and retaining experienced talent is crucial for the crypto industry's growth and maturity. Professionals in senior management, product, operations, legal, compliance, and technology roles will enter and stay in the digital asset sector only if they have confidence in its long-term stability.

Clear and supportive regulations are essential to creating a secure environment that encourages innovation and attracts talent. Additionally, crypto-native companies are becoming more competitive by offering attractive compensation packages and token-based equity opportunities. Building a reputable and stable professional environment will significantly enhance the industry's credibility and help attract the skilled workforce it needs.

What’s next?

For the next few Wednesday editions, we’ll keep exploring digital assets in more detail and how they are very different from other asset classes when it comes to global custody and what institutional clients will need from an asset servicing viewpoint. We’ll keep sending our industry news roundup every Friday. Let us know if there’s a particular topic you’d like to see covered in the newsletter by replying to this email.