- Key insight: The OCC needs to act before banks lose the ability to compete in a market where consumers no longer tolerate below-market-rate returns.
- What’s at stake: Banks and their regulators have a narrow window to reckon with custody modernization.
- Forward look: Banks and their trade groups should engage with the OCC now, rather than react to a standard they had no hand in shaping.
The head of crypto at Visa said recently that if he were running crypto at a bank, he would spend 95% of his time on on-chain lending. He’s right to focus there, but the more fundamental issue runs deeper than any single product category. On-chain infrastructure is in the process of making one of banking’s most durable value propositions available outside of the banking system — the safe, productive
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I say this not as a crypto advocate but as someone who has spent her career within the institutions this argument concerns. I have served in senior legal and policy roles at a federally regulated crypto bank, as a registered investment advisor who has held crypto at such institutions, and now at a company building on-chain noncustodial “vault” infrastructure that deploys crypto assets into decentralized finance yield-generating strategies. The threat is not a future risk. It is a present one, and the mechanism through which it operates is more specific than most bank strategists appreciate.
For most of financial history, customers have tolerated idle balances as an unremarkable feature of the financial system. Money sitting in a bank account earning little to no yield was simply the cost of keeping assets safe and accessible, and customers accepted the arrangement because the friction of moving money elsewhere outweighed the opportunity cost of staying put.
Tokenization and on-chain infrastructure will upend this system. When assets are represented on a distributed ledger and governed by programmable smart contract logic, those barriers begin to disappear. Money can be made productive by default: automatically, continuously and without requiring customers to actively manage deployment. On-chain vault infrastructure deployed today can enforce investor lockups and other transfer restrictions programmatically, preserve redemption rights at the contract level and route idle assets into yield-generating strategies without manual intervention. No bank (or any centralized intermediary, for that matter) needs to be in the chain.
The implications are serious. Bank deposits are cheap funding in part because customers have long tolerated the implicit subsidy of below-market yields on idle balances. As on-chain alternatives lower the friction of deploying assets productively, that tolerance erodes. The first customers to move will likely be the ones banks can least afford to lose: sophisticated, active investors with the largest balances.
The history of financial disintermediation follows a consistent pattern: Incumbents dismiss the threat as niche or premature, and by the time the shift is undeniable, the most valuable customers have already moved.
Money market funds did this to bank deposits in the 1970s. Fidelity and Merrill Lynch offered market-rate yields when Regulation Q capped deposit rates. Banks lost hundreds of billions in deposits before policymakers responded with the Depository Institutions Deregulation and Monetary Control Act of 1980. Online brokerages did it in the 1990s, permanently resetting what customers expected to pay for execution. Fintech payments did it in the 2010s — by the time banks responded with Zelle, Venmo had already set the standard.
On-chain infrastructure is the next iteration of this pattern. The assets moving first are digital (crypto, stablecoins, tokenized securities and other real-world assets), but the infrastructure being built today could eventually support a much larger share of financial markets. The relevant question is not “what do we do about crypto,” but what happens when new infrastructure systematically lowers the friction of making assets productive outside the banking system.
The instinctive response is to worry about credit. If deposits leave banks, doesn’t lending collapse? History suggests otherwise. The growth of money market funds, securitization and nonbank lending in prior decades prompted the same concern. Credit did not collapse; it reorganized. On-chain lending, one of the primary strategies into which vault infrastructure can route idle assets, and the most directly analogous to what banks have always done with deposits, is already emerging as a significant venue for credit provision. Deposits that leave traditional bank accounts do not disappear; they relocate into systems where risk and return are more transparently priced, and where those who actually supply the capital — consumers — capture a greater share of the reward. Banks that are permitted to engage seriously with on-chain lending infrastructure could be beneficiaries of that restructuring and not just its casualties.
The OCC will play a key role in how this story unfolds. As the chartering and supervisory authority for national banks, it determines whether the regulatory environment permits banks to compete on the dimensions where on-chain infrastructure is beginning to set the product standard. The question is whether the OCC will give banks the regulatory tools to participate before the window closes.
The asymmetry banks currently face is real and worth naming directly. On-chain infrastructure is being built and deployed at scale without the constraints that govern bank-offered equivalents. On the custody and yield dimensions most directly threatened by on-chain alternatives, banks are being asked to compete with one hand tied behind their backs. That asymmetry isn’t permanent, but closing it requires the OCC to engage with on-chain custody and yield architecture at a level of technical specificity it has not yet publicly demonstrated: distinguishing genuinely safe on-chain structures from those that are not, and building a supervisory framework that permits banks to offer competitive equivalents under appropriate oversight. The OCC has both the authority and the analytical tools to do this. What it has lacked, so far, is the urgency.
Other regulators are already moving. The Securities and Exchange Commission’s Division of Investment Management has identified custody modernization for digital assets as an active rulemaking priority in its 2025–2026 regulatory agenda. The framework that emerges will set reference points that other regulators will inevitably have to engage with, and the custody standard the SEC defines will become the baseline against which bank-offered alternatives are measured. Banks and their trade associations would be better served pressing for comprehensive engagement with the OCC now, while that framework is still being written, than reacting to a standard they had no hand in shaping.
None of this is an argument that banks are finished. Banks hold structural advantages that on-chain infrastructure cannot easily replicate: regulatory legitimacy, customer trust, balance sheet depth, payments infrastructure and more. But those advantages protect market position only when the product is competitive enough to keep customers from looking elsewhere. What is underway is a test of whether banks will remain the primary home for the assets and relationships that matter most. The window to engage seriously is open — but not indefinitely.