Barriers to Institutional Investment in Blockchain and Digital Assets

Ben Bevan 28 October 2025 21 Comments

By 2025, institutional investors manage over $130 trillion globally - yet most still sit on the sidelines when it comes to blockchain and digital assets. Pension funds, sovereign wealth funds, and endowments have the capital, the long-term horizon, and the mandate to diversify. But they aren’t moving. Why? It’s not because they don’t see the potential. It’s because the barriers are real, complex, and getting harder to climb.

Regulatory Uncertainty Is the Biggest Roadblock

Institutional investors operate under strict fiduciary rules. They can’t just buy Bitcoin or an Ethereum-based token because it looks promising. They need clear legal frameworks, defined custody standards, and regulatory approval. Right now, that’s missing.

In the U.S., the SEC still treats most crypto assets as securities - but doesn’t clearly say which ones. In the EU, MiCA is helping, but enforcement is uneven. In Asia, rules vary wildly between Singapore, Japan, and Hong Kong. For an institution managing billions, this isn’t just a compliance headache - it’s a legal risk. One wrong move could trigger audits, fines, or even lawsuits.

Even when regulations exist, they’re often outdated. Think about custody: traditional custodians like banks and trust companies aren’t equipped to hold private keys. Crypto-native custodians like Coinbase Custody or Fidelity Digital Assets are gaining ground, but many institutions still don’t trust them. They want the same level of insurance, audit trails, and regulatory oversight they get with equities or bonds. That’s not yet standardized across the industry.

Technology Infrastructure Is Lagging

Institutional systems were built for stocks, bonds, and mutual funds. They’re not designed for blockchains.

Most portfolio management platforms can’t track tokenized assets in real time. Settlement cycles are still T+2. Blockchain settles in minutes. Reconciliation tools don’t understand smart contracts. Tax reporting systems can’t handle staking rewards, airdrops, or forked tokens.

Deloitte found that over 60% of institutional investors are investing in tech upgrades - but not for crypto. They’re fixing cybersecurity, data analytics, and reporting tools for traditional assets. Crypto gets pushed to the bottom of the list because it’s seen as a side experiment, not core infrastructure.

And then there’s cybersecurity. Hacks aren’t just about losing money - they’re about reputation. A single breach in a digital asset wallet can trigger regulatory scrutiny, client panic, and media firestorms. Institutions aren’t willing to risk that without ironclad protocols - and those are expensive to build.

Private Market Complexity Is Growing Faster Than Expertise

Institutional investors want exposure to blockchain. But they don’t want to buy Bitcoin. They want to invest in blockchain infrastructure - protocol tokens, staking pools, decentralized finance (DeFi) protocols, tokenized real estate, and private blockchain ventures.

Here’s the problem: these assets are wildly complex. A DeFi protocol might involve yield farming, liquidity mining, governance voting, and smart contract risk. Few portfolio managers understand the math behind APR calculations, impermanent loss, or gas fee arbitrage. Even fewer can assess the security of a new smart contract audit.

Nuveen’s 2025 survey shows 90% of institutions now hold private equity and private credit. But only 18% feel confident evaluating blockchain-based private funds. The talent gap is real. Hiring a blockchain specialist costs 2-3x more than a traditional asset manager. And even then, retention is tough - top engineers and DeFi analysts are being snapped up by crypto-native firms offering equity and faster innovation cycles.

Dual-panel custody system contrast showing traditional vaults and cracked digital vault with trust gap

Liquidity and Exit Challenges Are Real

Institutional investors need liquidity. They need to be able to sell assets quickly when markets shift - and blockchain assets often can’t deliver that.

Even the biggest tokens like Bitcoin and Ethereum have thinner institutional depth than S&P 500 stocks. During market stress, bid-ask spreads widen. Large sell orders move prices dramatically. That’s unacceptable for a $50 billion pension fund trying to rebalance.

Tokenized assets - like real estate or private company shares on a blockchain - are even worse. They’re illiquid by design. Secondary markets are fragmented. Trading is often restricted to accredited investors. Liquidity pools are small. And when institutions try to exit through secondary platforms, they hit legal and compliance walls: KYC checks, jurisdictional restrictions, and limited buyer pools.

McKinsey reported that private market fundraising hit its lowest level since 2016 in 2024. That’s not just about capital - it’s about exit pathways drying up. Institutions don’t want to lock up capital for 10 years without a clear way out.

Costs Are Rising, Not Falling

You’d think blockchain would cut costs. But for institutions, it’s the opposite.

Setting up custody, integrating with blockchain data feeds, hiring compliance staff trained in crypto regulations, running audits on smart contracts - all of this adds layers of expense. A single blockchain investment program can cost $2-5 million just to launch.

And then there’s the fee structure. Many blockchain funds charge 2% management fees and 20% performance fees - the same as hedge funds. But unlike hedge funds, they don’t have decades of track records. Institutions are being asked to pay premium fees for unproven strategies.

Meanwhile, passive index funds in traditional markets are charging 0.03% or less. Why pay 100x more for something that feels risky and opaque? The math doesn’t add up - not yet.

Suit-wearing investor examining a blockchain network with floating compliance questions

Geopolitical Risk Is Making Global Access Harder

Blockchain is global. But institutions aren’t.

Natixis found that 34% of institutional investors see U.S.-China tensions as their biggest threat. That’s not just about trade wars - it’s about access. A fund based in the U.S. can’t easily invest in a Chinese blockchain project. A European fund can’t touch a Russian one. Sanctions, export controls, and data localization laws are fragmenting the digital asset landscape.

Even if an institution wants to invest in a global DeFi protocol, it can’t. Many protocols restrict users by geography. Some wallets block IP addresses from sanctioned countries. Some exchanges refuse to serve institutional clients from certain jurisdictions.

This isn’t just about politics - it’s about operational reality. Institutions need to know where their assets are, who controls them, and what laws apply. That’s impossible when the underlying network is decentralized and borderless.

Decision Paralysis Is Setting In

In 2025, 64% of institutions expect a soft landing - not a recession. That’s better than 2024’s 51% fear of recession. But it’s not enough to move the needle.

Why? Because the signals are mixed. Equities are volatile. Interest rates are stuck. Inflation is sticky. And blockchain? It’s either a revolution or a bubble - no middle ground.

Institutional investors are stuck in analysis mode. They see the potential. They’ve read the reports. But they can’t find a single framework that answers the big questions: Which blockchain assets are truly investable? Who can custody them safely? How do we measure risk?

Without clear benchmarks, standardized reporting, or trusted third-party validation, they’re waiting. And waiting. And waiting.

The Path Forward Isn’t About Tech - It’s About Trust

The barriers aren’t technical. They’re institutional.

The solution isn’t more blockchain. It’s more structure.

Institutions need: standardized custody rules, regulated token classifications, verified smart contract audits, transparent fee benchmarks, and cross-border legal clarity. They need trusted intermediaries - not just exchanges, but auditors, custodians, and compliance providers who understand both finance and blockchain.

Some are starting to build this. BlackRock’s BUIDL fund, Fidelity’s crypto custody platform, and JPMorgan’s Onyx blockchain are early signs. But they’re still islands in a sea of uncertainty.

Until institutions can treat blockchain assets like they treat U.S. Treasuries - with clear rules, reliable custody, and transparent pricing - the capital won’t flow. The technology is ready. The investors are watching. But the system isn’t.

Why are institutional investors hesitant to invest in blockchain?

Institutional investors are hesitant because of regulatory uncertainty, lack of standardized custody solutions, poor liquidity in many digital assets, high operational costs, and a shortage of internal expertise. They need clear legal frameworks and proven risk controls before committing large sums - and those are still evolving.

Can institutions invest in Bitcoin directly?

Some can - but only through approved custodians like Fidelity or Coinbase Custody, and only if their internal policies allow it. Most still prefer indirect exposure via ETFs or futures, which offer more regulatory clarity and easier accounting. Direct ownership remains rare due to custody and compliance risks.

What’s the biggest risk in blockchain investing for institutions?

The biggest risk isn’t price volatility - it’s operational and legal. A single smart contract bug, a custody breach, or a regulatory crackdown can trigger massive losses, lawsuits, or reputational damage. Unlike traditional assets, blockchain lacks standardized insurance, audit trails, and legal recourse.

Are blockchain ETFs a good entry point for institutions?

Yes - for now. Spot Bitcoin and Ethereum ETFs provide regulated, exchange-traded exposure without the need for direct custody. They’re easier to integrate into existing portfolios and report on. But they’re still limited in scope - most only cover Bitcoin, not DeFi, tokens, or infrastructure projects. They’re a gateway, not a full solution.

How long until institutions fully embrace blockchain?

It won’t happen overnight. Full adoption requires standardized regulations, reliable custody, and proven risk models - all of which are still in development. Most experts estimate 5-10 years for widespread institutional adoption. Early adopters are already testing the waters, but mass movement will wait for the system to mature.

What’s the difference between institutional and retail blockchain investing?

Retail investors buy based on trends, memes, or speculation. Institutions need fiduciary justification, risk controls, audit trails, and legal compliance. They can’t afford to gamble - they’re managing other people’s money. That’s why they demand structure, transparency, and third-party validation - things most crypto projects still don’t provide.