The explosive growth of crypto ETFs in 2026 hides an "Achilles' heel": a single custodian controls 85% of global assets

SEC New Regulations Open the Gates, but Risks Follow

September 17, 2025, the U.S. Securities and Exchange Commission(SEC) approved general listing standards for crypto asset products(ETP), reducing the ETF approval cycle from a lengthy wait to just 75 days. This reform immediately sparked heated industry discussions.

According to Bitwise’s forecast, over 100 crypto-related ETFs are expected to launch in 2026. Senior Bloomberg ETF analyst James Seyffart supports this prediction but also issues a warning: “We are about to witness a wave of ETF liquidations.”

This combination is concerning—explosive growth and rapid淘汰 will define the upcoming market rhythm. For leading assets like Bitcoin($93.06K), Ethereum($3.22K), and Solana($134.06), the new rules reinforce their market dominance. For other coins, it will be a true survival test.

History Repeats: The 2019 ETF Stock and Bond Market Story

These standards are not the first of their kind. In 2019, the U.S. securities market saw a similar scene—annual launches of stock and bond ETFs surged from 117 to over 370. What followed? Rapidly lowered commission rates, with dozens of small funds closing within two years.

Today, the crypto market is repeating the same script, but under even harsher initial conditions.

Hidden Systemic Risks: Custody Concentration Crisis

The most unsettling issue is extreme concentration of custody infrastructure.

Current data shows that a single major custodian controls up to 85% of global Bitcoin ETF assets. This is not just a number—it’s a structural bomb.

Any operational disruption, security incident, or liquidity problem at this custodian could trigger cascading risks across the entire ETF ecosystem. Hundreds of new funds, trillions of dollars in institutional capital, and millions of retail investors—everyone connected through the same “bottleneck.”

Other custodians are indeed trying to re-enter the market. Some large banks and professional custody providers are reassessing crypto custody, but scale remains limited. The core issue is: no custodian wants to bear high security and insurance costs unless they can quickly achieve economies of scale.

Multi-layered Liquidity Crisis

The seemingly simple creation/redemption mechanism(Creation/Redemption) hides multiple danger points:

1. Constraints on Market Makers and Authorized Participants(AP)

• These market participants need to price and lend on several specific trading venues
• Many small coins lack sufficient derivatives liquidity to cover creation/redemption flows
• What does this mean? Any large transaction could significantly impact market prices

2. SEC reforms on July 29, 2025

• New rules allow Bitcoin and Ethereum trusts to settle with actual digital assets instead of cash
• Sounds good, but in practice, authorized participants must acquire, hold, and manage tax issues for each basket
• Manageable for liquid assets like BTC and ETH, but a nightmare for less liquid assets

3. Real threats of liquidity exhaustion

• When a new ETF launches a small token, authorized participants demand wider bid-ask spreads or even exit entirely
• ETFs forced to settle in cash will have larger tracking errors
• Once lending disappears during market volatility, authorized participants stop creating new shares, and ETFs may trade at a premium until liquidity recovers

Infrastructure Moans

Exchanges face real dilemmas:

Authorized participants and market makers can handle larger creation/redemption volumes—provided the assets are sufficiently liquid. Their real limit is the availability of shorting supply. When a new ETF launches a token with scarce lending, they either demand higher fees or exit, ultimately leading to cash-settled ETFs with high tracking errors.

Exchanges can suspend trading when reference prices stop updating—this risk exists even under fast-track approvals.

Index providers wield invisible power:

The new general standards tie qualification to regulatory agreements and benchmark indices that meet exchange standards. In practice, this means a few companies(like CF Benchmarks, MVIS, and S&P) control index design.

The crypto market is copying the traditional ETF model—wealth platforms choose indices they recognize, and even with better methodologies, newcomers find it hard to break through.

2026 ETF Ecosystem Landscape

Single-Asset Products( Bitcoin/Ethereum Clones)

• Possibility: Many zero-fee or low-fee BTC/ETH products from secondary issuers; various share classes, currency hedged variants
• Custody Status: A major custodian still controls over 80% of BTC/ETH ETF assets; other banks are entering but with limited scale. Concentration risk remains high
• Creation/Redemption: Infrastructure is basically “solved,” competition mainly on fee rates
• Need for new 19b-4 filings? No, as long as they meet the general standards for commodity trust shares

Small-Cap Coins( Solana, XRP, Litecoin, etc.)

• Possibility: Coins like XRP($1.97), ADA($0.37), LTC($70.20), LINK($12.76), DOT($1.97), XLM($0.21), with existing or near-qualified futures
• Custody Status: One major custodian plus a few specialists. Smaller custodians will struggle to bear sufficient security costs
• Index Design: Power concentrated among CF, CoinDesk, Bloomberg; market makers face real lending and shorting constraints; even with physical delivery allowed, hedging lending is much harder than BTC/ETH
• Need for new 19b-4 filings? Usually not, if the underlying assets pass the general test

Large-Cap Basket Products( Top-N Index)

• Possibility: “Large-cap crypto basket”(BTC+ETH+XRP+SOL+ADA mix), “Top 5 by market cap” or similar combinations
• Risks: Custody often managed by a single provider to simplify processes, amplifying “single point of failure”
• Index rules: Dominated by CF Benchmarks, CoinDesk, etc.; each component still needs to pass separate futures/regulatory tests
• Need for new 19b-4 filings? No, if all components meet the general standards

Thematic/Strategic ETFs( DeFi, L1/L2 Smart Contracts)

• Possibility: Hybrid baskets of qualified and unqualified assets, like “DeFi blue chips” or “Layer1/2”
• Risks: Multiple providers for custody, conflicts between index design and regulatory flexibility, creation relies on multiple small coins with liquidity
• Need for new 19b-4 filings? Usually yes. Any unqualified component assets mean losing the protection of the general standards

Derivatives Coverage Strategies( Options Sellers, Yield Strategies)

• Possibility: Buy-write on BTC/ETH, loss-limited strategies, protective puts, etc.
• Risks: Operational complexity, creation pauses during volatility spikes, persistent NAV premiums
• Need for new 19b-4 filings? Yes. Products involving active management, leverage, or “novel features” are outside the scope of the general standards

When Will the ETF Liquidation Wave Arrive

The ETF industry tracker records dozens of fund closures each year. Typically, funds with assets below $50 million struggle to cover costs and close within two years.

Seyffart predicts a large-scale liquidation of crypto ETFs will occur in late 2026 to early 2027. The most vulnerable will be:

• High-fee repeat single-asset products
• Niche index products
• Thematic bets, especially when the underlying market evolves faster than ETFs can adapt

The kill effect of fee wars:

New Bitcoin ETFs launched in 2024 with a fee rate of 20-25 basis points(0.20%-0.25%) immediately cut early issuers’ fees in half. As supply continues to grow, issuers will further lower fees on flagship products, leaving long-tail funds unable to compete on fees or performance.

Secondary market mechanisms first fail on illiquid assets:

When a small-cap token in an ETF has limited lending, demand peaks push premiums higher until authorized participants acquire enough tokens. If lending disappears during volatility, APs stop creating, and premiums persist.

Early crypto index ETFs experienced net redemptions and sustained discounts, with investors focusing on big-brand single-asset funds to avoid mispricing.

The “Crowning Effect” on Leading Coins

For Bitcoin($93.06K), Ethereum($3.22K), and Solana($134.06), ETF explosion tells a different story.

Each new ETF wrapper:

• Opens new avenues for institutional capital
• Thickens lending markets
• Tightens bid-ask spreads
• Increases appeal to advisors(who are prohibited from direct digital asset holdings)

Bitwise expects these three assets to absorb more than 100% of net new supply growth, creating a virtuous cycle: larger ETF ecosystem → more robust lending markets → tighter spreads → stronger institutional attraction.

Boundaries and Power Distribution of the Regulatory Framework

The general standards exclude active management, leverage, and “novel features” ETFs—these still require separate 19b-4 proposals.

Want to launch a passive Bitcoin spot ETF? Done in 75 days. Want 2x leverage with daily resets? Go back to the old system.

SEC Commissioner Caroline Crenshaw warns: these standards may allow product proliferation without case-by-case review, creating fragile correlations—only during crises will regulators realize the issues.

The Real Question: Who Makes the Decisions?

Rules push heavyweight participants into the most liquid and institutionalized corners of crypto. The stakes are simple:

Custody Concentration Double-Edged Sword:

• Will ETF proliferation consolidate infrastructure around a few coins and major custodians, or disperse risk?
• The custodian controlling 85% of assets now earns revenue and bears risk
• Any single point of failure could scare the entire ecosystem

The Power of Asset Scale:

• A major custodian’s assets under custody hit $300 billion in Q3 2025
• This scale creates network effects but also vulnerabilities
• Until regulators or clients enforce diversification, centralization remains profitable

Creator’s Gamble:

• Issuers expect some funds to survive, subsidizing others
• Authorized participants aim to extract spreads before a fund stalls
• Custodians believe concentration is more profitable than competition

Conclusion: Easy to Launch, Hard to Survive

The general standards lower the barrier to entry for crypto ETFs but do not reduce the difficulty of staying alive.

For certified coins and top-tier infrastructure, 2026 will be the crowning moment of institutional integration. For all other coins, it will be a meat grinder—winners take all, others face liquidation.

The real test comes from the next market pressures—when liquidity evaporates, lending dries up, and these hidden concentration risks surface.