I don't think they are allowed to use this sort of practice, and probably will never be. It could even be considered fraud if you think about it.
They're not a bank and have no banking license or something close to that.
And if the bank can practice the fractional reserve, it's because they invest in the economy IRL. What the custodial services would with it? No idea but surely not investing in the economy IRL.

You were probably thinking about ETF when the person thinks they are truly buying a product while in fact, it's just a promise of future ownership. Well, exactly what we have now with Gold's ETF