With Bitcoin at Record High, Smaller Banks Face Urgent Crypto Decisions

New rules for cryptocurrency could be around the corner in the U.S., and in many ways the industry is already preparing for its fully-mainstream debut. There are few more telling signs of the shift the crypto landscape has undergone than the fact that JPMorgan Chase, as of Monday (May 19), now offers its clients access to bitcoin.

“I don’t think you should smoke, but I defend your right to smoke,” JPMorgan CEO Jamie Dimon said, per reports. “I defend your right to buy bitcoin.”

For its part, the price of bitcoin on Wednesday (May 21) hit a new all-time high, rising to $109,500 as of reporting.

But while major financial institutions have the capacity to rapidly accelerate their adoption and integration of crypto technologies, as well as the heft and governance to handle the sector’s many risks, smaller community banks could find themselves lagging in emergent on-chain financial services, creating a widening competitive gap within the industry.

After all, prominent big banks, such as JPMorgan Chase, Bank of America and Citibank, have already embraced cryptocurrencies by heavily investing in blockchain technologies and infrastructure.

But as the smaller players that make up traditional finance start to eye blockchain, there is the potential the landscape could become polarized based on institutional size and technological capability.

Read also: OCC Says Banks Can Hold Crypto, but Should They?

Should Smaller Banks Be Worried?

The question remains whether smaller banks should feel threatened by big banks’ aggressive cryptocurrency adoption. Credit unions (CUs), community banks and other regional lenders traditionally rely on personalized customer relationships, local market expertise and conventional banking products to support their business.

The cryptocurrency wave could threaten their core business models, especially if customer preferences evolve toward digital-first and crypto-integrated financial services. Stablecoins, in particular, could represent a growing competitor for the retail deposits that underpin community bank lending.

Stablecoins facilitate financial transactions without intermediaries (e.g., banks), promoting a peer-to-peer economy. This directly reduces the intermediary role played by small banks, diminishing their relevance and ability to retain deposits.

Small banks also rely heavily on customer deposits for funding loans and other financial services. If customers shift their deposits into stablecoins, and unless regulation steers stablecoin reserves back into insured accounts, banks may lose liquidity, making it harder for these banks to lend, invest and operate profitably.

“With community banks using deposits to make 60% of the nation’s small-business loans and 80% of banking industry agricultural lending, mitigating the risk of retail deposits migrating out of community banks — which have proven commitments to their communities and local credit creation — is critical,” Independent Community Bankers of America (ICBA) President and CEO Rebeca Romero Rainey said in a May 8 press release ahead of a Senate vote on the GENIUS Act.

At the same time, large FinTech platforms and stablecoin issuers might directly compete with small banks by offering stablecoin-based banking and payment solutions, thereby capturing market share traditionally served by smaller financial institutions.

Read also: Crypto Firms Grapple With Bank-Like Risks, Without the Regulation

Strategic Positioning for Small Lenders

Still, the latest findings from the “Credit Union Innovation Readiness Index: The Smallest Credit Unions Step It Up,” a PYMNTS Intelligence and Velera collaboration, reveal that, when it comes to innovation, smaller lenders aren’t standing still.

One of the advantages of smaller banks is their ability to adopt collaborative models. Partnering with FinTech firms or crypto startups could provide them affordable access to blockchain technologies and expertise. Such partnerships could level the playing field, providing the agility and innovation often lacking in larger, slower-moving institutions.

“Banks are in the state where they are thinking about blockchains as public infrastructure that they need to rely on,” Chainalysis Co-founder and CEO Jonathan Levin told PYMNTS. “Back in 2014 … cryptocurrency only meant blockchains that had native cryptocurrency tokens. Today, people are putting all types of financial instruments on the blockchain.”

For small lenders, strategic adaptation could prove critical. Banks can work to evaluate their customer demographics and identify genuine interest in crypto products. If demand exists, these institutions can cautiously integrate cryptocurrency products, beginning with simple offerings such as crypto custodial services or partnerships with trusted crypto platforms.

The U.S. Securities and Exchange Commission (SEC) said earlier this month that it is eying regulatory changes to accommodate on-chain securities and other crypto assets.

Customer education can be another powerful tool. Small banks hold trusted relationships within their communities, positioning them uniquely to guide clients through cryptocurrency complexities responsibly.

Ultimately, the landscape may not favor size alone but agility, responsiveness, and customer-centric innovation. Crypto adoption might redefine the banking industry’s competitive parameters, enabling smaller banks to find niches where big banks can’t easily follow.