We investigate the rapidly evolving world of cryptocurrency compliance as financial institutions plan to expand into digital assets.

Despite recent market volatility in the cryptocurrency market, firms continue to hold and provide custody services for digital assets, and are pushing forward with plans to build businesses around them. For financial institutions, the risk profile of cryptocurrency is evolving just as rapidly as its acceptance.

On a recent Double Take podcast, we spoke with regulatory and risk management specialists to better understand how their thinking around cryptocurrencies is progressing.

Alison Jimenez, founder of Dynamic Securities Analytics, has long specialized in securities, litigation, economic analysis and anti-money laundering consulting. More recently, her practice has rapidly evolved to include cryptocurrency tracing and the dissection of its inner workings. She said that as crypto value exploded, many risks metastasized.

Rising price can hide a lot of things that you don’t necessarily realize, until the tide goes out … Some of the risks that perhaps were not as obvious when (crypto) was only going up endlessly,  that is now being uncovered as things come down, are some of the risks that are more tied to things that were traditionally considered securities type violations … market manipulation or other type of financial product crimes … having bad collateral for loans.

Alison Jimenez, founder of Dynamic Securities Analytics

Jimenez mentioned how cryptocurrency’s risk profile is now more complex, beyond it being used as a way to pay for dark-web drugs or stolen credit card information. Now, regulators are surveying for market manipulation through ‘wash trading’ – the process in which co-conspirators trade a coin, token or non-fungible token (NFT) back and forth in hopes of escalating its price. In the scheme, the inflated asset is then posted as collateral for a loan – what Jiminez has taken to calling the ‘pump and chump.’

Jimenez said these types of machinations put the onus on financial institutions – which are bound by anti-money laundering and ‘know your customer’ (KYC) rules – to sharpen their focus on the source and intent of cryptocurrency transactions. This can be difficult to accomplish, as such transactions are often pseudonymous.

When you’re, let’s say, a custodian who’s collecting assets and you’re letting people earn an interest on those assets – who’s your counterparty? Who are you lending it to? Do they have the security? Make sure there’s not a hack. Do they have the right collateral? Do they know what they’re doing? Some of these are fly-by-night that pop up and disappear. Do they have folks that are behind it who have prior fraud convictions? Do you actually know who you’re dealing with?

Alison Jimenez

As investors grow more adept at trading cryptocurrency, a new field of blockchain analytics has emerged. The tools study patterns of fraudulent cryptocurrency transactions for potential red flags and tag cryptocurrency wallets that belong to previous bad actors. These analytics remain limited, Jimenez explains, as the data they scrutinize tend to be solely sourced from public blockchain data, not from within the private cryptocurrency exchanges where most transactions take place.

Still, these tools are becoming vital for financial institutions whose clients want to own cryptocurrencies. Katy Neate, Chief Risk Officer for Securities Services and Digital at BNY Mellon, which unveiled plans for a new cryptocurrency custody business last year, told Double Take that expanding the bank’s risk framework is critical to its expansion into digital assets.

Industry participants will need to work together and learn from each other and bring all the skills to the table, and it’s only really in that way that we can advance as an industry. We are increasingly seeing the role of fintechs (financial technology companies) as critical to our strategy, and those of many of our peers. We are leveraging our digital expertise, and we’ve invested in strategically integrating the capabilities of leading fintechs to accelerate the development of our solutions that integrate digital-asset custody, execution, administration services, seamlessly with traditional assets.

Katy Neate, Chief Risk Officer for Securities Services and Digital at BNY Mellon

Today, Neate explained, the majority of cryptocurrency investors are required to completely separate their digital assets from their other investments, and they have difficulty merging them into a singular brokerage account. Firms like BNY Mellon are aiming to provide solutions for that separation.

The headlines have been a rollercoaster riding crypto for a while now, and of course the reputational risk is something we pay close attention to when we’re considering any new product. We’re not in the business here of taking a position on the price of crypto. What we’re looking to provide is access to these markets for our clients, who want to see the interoperability across the traditional space in their digital assets… In the traditional space, we see those highs and lows, but we don’t step back from our traditional custody product when equity prices drop.

Katy Neate

Subscribe to “Double Take” on your podcast app of choice or view the Compliant Crypto episode page to listen in your browser.


Jack Encarnacao

Jack Encarnacao

Research analyst, investigative, Specialist Research team

Raphael J. Lewis

Raphael J. Lewis

Head of specialist research

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