Why would banks do that? Isn't Fiat better for them? Besides, Bitcoin is not legal tender. How would banks allow customers to deposit something that isn't officially recognized as such by the government? Regulators would surely be on their tails.

Bitcoin is all about being your own bank. When we let traditional banks take over, we'd be bringing back the middleman (a single point of failure). This is something Satoshi meant to avoid in the first place. I've thought spot ETFs were bad in the sense that it opened the doors to "Wall Street". But letting banks in, is much worse. I hope this never materializes during our lifetime. Only time will tell...