Bitcoin Won't Replace Banks. It Could Become Their Quiet Reserve Asset. — Barrons.com
By Emir PhillipsAbout the author: Emir Phillips is an associate professor of finance at Lincoln University. His research on central banking and the political economy has appeared in the Cambridge Journal of Economics and the Journal of Economic Issues .Nearly 20 years after Satoshi Nakamoto debuted Bitcoin as the ultimate banking disrupter, banks are still here. Central banks are bigger than ever. Most people who own bitcoin do so through brokers, exchanges, or exchange-traded funds — not by running full nodes or buying groceries in sats.So Bitcoin hasn't replaced banks, and it isn't showing up at the cash register in the ways Nakamoto expected. But that doesn't make it irrelevant for the financial industry. Commercial banks, and even central banks, are starting to embrace bitcoin at their deepest levels. For investors, the key question isn't when will everyone start spending bitcoin in retail settings. It is when banks, brokers, and clearing houses start relying on it under their hoods.U.S. Bancorp is reviving its bitcoin custody service for institutional clients after a three-year pause, encouraged by the Trump administration's friendly regulatory stance and surging demand for spot bitcoin ETFs. BNY is offering clients digital-asset custody. It is also tokenizing money-market funds with Goldman Sachs and others. In Europe, Deutsche Börse's Clearstream is launching institutional bitcoin custody and settlement.Bitcoin will soon show up in treasury departments, collateral schedules, and regulatory rulebooks. For bank-stock investors, bondholders, and bitcoin-ETF buyers, that is the scenario worth pricing.Crypto debates often treat money as a single object you either "fix" or "disrupt." Modern finance doesn't work that way. It's more layered. At the base of the financial system sits central-bank money: reserves and physical cash. On top of that, commercial banks issue deposits — our checking and savings accounts — with promises to deliver base money on demand. Above that sits a dense web of repo, money-market funds, derivatives margin, and now stablecoins and tokenized funds. All of those function as money-like IOUs in wholesale markets.There are parallels to the gold standard. Under the classical gold standard, gold sat at the very bottom of that stack. Central banks held bullion, banks held claims on central banks, and the public held notes and deposits. Physical gold rarely moved. The system ran on layered claims.Early bitcoin evangelists imagined they could disrupt this arrangement. The peer-to-peer electronic cash system they envisioned would bypass banks entirely.But, in practice, most people interact with bitcoin through centralized intermediaries. They hold it as a speculative asset or long-term store of value, not as everyday money. On-chain capacity is limited. Fees spike when blocks are full. Volatility makes bitcoin unusable as a unit of account for most firms.Bitcoin behaves less like a payments rail and more like a nonsovereign reserve asset — the sort of thing that lives at the bottom of the hierarchy, not the top.Back in 2010, one of bitcoin's earliest developers, Hal Finney, sketched out exactly this kind of future in an online discussion. He didn't picture lattes being paid for directly on the base chain. Instead, he imagined banks holding bitcoin in reserve. Those banks would issue digital IOUs — deposits or tokens — redeemable in bitcoin. On-chain transfers would be used mainly to settle net positions between institutions, not retail payments.In this model, bitcoin looks a lot like gold under the old system: a reserve asset at the bottom of a pyramid of money, with most economic activity running on the higher layers of banks' liabilities.Technology is pushing banks in that direction. Bitcoin's base layer is optimized for security and finality, not high-frequency retail traffic. Limited throughput and a fee market naturally push smaller payments onto higher-layer solutions like the Lightning Network, a payment-scaling protocol that has grown steadily as a way to route small transactions off-chain. For large holders and institutions, on-chain economics favor big, infrequent, high-value movements — the kind of flows treasury desks care about.Market practice is converging as well. Large financial institutions are building digital-asset infrastructure — custody, tokenization, and collateral services. BNY's platform, new tokenized Treasury and money-market funds, and multiple bank-led pilots show how quickly "digital assets" are being folded into conventional balance sheets and collateral chains.For this shift to happen at scale, banks need tacit permission from regulators.They are starting to get it.In 2022, the Bank of International Settlement's Basel Committee on Banking Supervision finalized global rules on banks' cryptoasset exposures. For the first time, those standards explicitly allowed banks to hold bitcoin and other crypto assets on balance sheet, albeit subject to strict capital treatment and a hard cap.Under the new framework, volatile "Group 2" cryptoassets such as bitcoin are subject to heavy capital charges and tight exposure limits: banks' aggregate exposures are expected to remain below 1% of Tier 1 capital and are capped at 2%. If the limit is breached, the whole portfolio can be penalized with the harshest capital treatment.This won't turn JPMorgan Chase into a crypto hedge fund. But it does inch bitcoin from "unmentionable" to "admissible, within strict limits" within banking. From a regulatory perspective, crypto is starting to be treated as a high-volatility reserve asset — a distant cousin of gold, even if the two assets don't overlap in their stability or history.Rhetoric has shifted as well. Central bankers who once dismissed bitcoin now acknowledge it is a store of value. Federal Reserve board member Christopher Waller said this year that crypto is no longer "viewed with suspicion or scorn." For investors, this shift matters because it changes how liquidity is managed, how collateral chains behave under stress, and how exposed bank balance sheets are to a nonsovereign asset whose price can swing 20% in a week.Volatility is an obvious risk. If an asset that can fall sharply backs runnable short-term liabilities, a market shock can force fire sales, higher haircuts, and balance-sheet deleveraging — amplifying stress rather than cushioning it. That is why Basel's "Group 2" regime is so tight and why some U.S. rules on crypto custody were initially restrictive enough to make the business uneconomic.There is also regulatory risk. Monetary authorities are unlikely to tolerate a stateless asset anchoring their banking systems without a say. If bitcoin starts to matter for bank funding or collateral, expect regulators to respond with more intrusive reporting, targeted stress tests, and direct limits or sectoral capital surcharges.And there is governance risk. Bitcoin's protocol and infrastructure aren't governed like central banks. Power is concentrated among core developers, miners, large holders, and key service providers. A contentious fork or serious bug in an asset sitting on bank balance sheets may force regulators into the awkward position of having to effectively pick winners in what was supposed to be a neutral network.From the vantage point of credit-based money, anchoring a fractional-reserve banking system in bitcoin revives old worries about gold-standard-style constraints and deflationary bias. Bitcoin can serve as collateral or reserve; it can't decide when to support aggregate demand or backstop a bank run. The public sector, one way or another, will remain in the loop.Bitcoin is unlikely to fulfill Nakamoto's original vision of a fully depoliticized, stateless cash. It is more likely being folded, layer by layer, into the existing public-private banking architecture as a volatile, contested, but increasingly recognized reserve and collateral asset.Retail investors should therefore price bitcoin as a sort of plumbing. They should note which banks and market utilities become the custody and settlement hubs, how regulators translate crypto into capital and liquidity rules, and whether bitcoin starts showing up as collateral in repo, derivatives, and treasury operations. Bank-stock investors and bondholders should pay attention to whether this becomes a durable fee business.This isn't the future many bank executives had in mind — especially those who waved bitcoin off as a distraction just a few years ago. But for anyone who reads balance sheets, it could be the biggest bitcoin story yet.Guest commentaries like this one are written by authors outside the Barron's newsroom. They reflect the perspective and opinions of the authors. Submit feedback and commentary pitches to [email protected] .This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.