This article outlines practical risk management strategies for banks that are offering crypto services in 2025 and beyond, helping them balance the opportunity with prudent risk mitigation.
Despite the volatility witnessed during previous crypto cycles, blockchain technology and digital currencies have become an integral part of the financial services landscape. The question is no longer if banks should offer crypto products and services, but how to manage the risks while doing so.
Some of the major banks, including JP Morgan, Bank of America, Standard Chartered, and Citibank have already entered this space offering services such as crypto custody, trading services, and blockchain based payment solutions. Now as these solutions expand, so do the risks associated with crypto products and services.
Strong risk management isn’t just about compliance—it gives banks a competitive edge in the crypto business. Those that can navigate and manage crypto risks while delivering innovative services can capture a significant market share and gain a stronger foothold in this evolving market.
The Risk Landscape for Banks Offering Crypto Services
Banks venturing into crypto services may face several distinct risk categories that require targeted management approaches. Understanding these risks is the first step in developing effective mitigation strategies.
1. Market Risk
While the markets for crypto currencies have quite matured, a significant price volatility or fluctuations continues. This price volatility leads to a direct exposure for banks that hold digital assets on their balance sheets and indirect exposure for providing custody or trading services to clients.
2. Counterparty Risk
Banks need to rely on cryptocurrency exchanges, custodians, and technology providers when offering crypto services. In case these partners experience operational problem or financial distress, this can impact the bank’s ability to server their clients. Recent failures of some crypto exchanges and lending platforms has demonstrated how quickly such counterparty issues can spread through the ecosystem.
3. Financial Crime Compliance Concerns
Crypto is an attractive space for bad actors. According to recent data, crypto scams increased by over 40% between 2021 and 2022, highlighting the need for robust monitoring systems. Read more on how cryptocurrency is linked to financial crime and money laundering.
4. Regulatory Risk
Regulations governing cryptocurrencies are becoming clearer when compared to previous years. However, they continue to evolve, and this creates a challenge for banks to keep up with these changing requirements across multiple jurisdictions and simultaneously prepare for the upcoming regulatory changes. With crypto regulations constantly evolving, banks must stay ahead to avoid compliance pitfalls. Explore the biggest compliance challenges banks face and how to address them.
5. Security Risk
Banks need different approaches to secure crypto assets than how they secure their traditional assets. Private keys need to be protected, and custody solutions provided by banks and their partners must be guarded against external cyberattacks and internal threats. Due to the immutable nature of blockchain transactions, if private key is compromised or smart contract exploited in security breaches, the transactions cannot be reversed, which can lead to irreversible losses for the banks.
6. Operational Risk
Blockchain technology introduces operational complexities which include:
- Smart contract risks
- Blockchain forks
- Integration challenges with legacy system
Therefore, even an error in smart contract could result in significant financial losses with limited recourse for correction.
7. Reputational Risk
Banks offering crypto services need to be careful and aware of the fact how these offerings would affect their broader reputation and position in the market. Negative incidents even if caused by factors outside bank’s control can impact customer trust. Crypto breaches often receive heightened media attention that may potentially impact bank’s overall position and perception.
Risk Management Strategies for Banks Offering Crypto Services
Banks can successfully navigate the crypto landscape by employing several strategies discussed below to mitigate the risks mentioned above. These approaches combine traditional risk management principles with crypto-specific tool and methodologies.
1. Blockchain Intelligence and Analytics
Many leading banks now employ blockchain analytics to monitor transactions in real-time. These helps in identifying suspicious patterns and potential compliance issues before they escalate. Some key aspects include-
- Know your transaction (KYT), which is an extension of the traditional KYC. KYT involves evaluating blockchain transactions as they happen, verifying the transfers-ensuring they don’t go into sanctioned wallets or bad actors.
- Transaction monitoring platforms to track on-chain activity across multiple blockchains and detect and flag unusual behaviors indicative of potential fraud or money laundering.
- Risk scoring systems to assign risk levels to wallet addresses based on their transaction histories and connections.
For example, JP Morgan Chase uses its proprietary blockchain analytics platform to screen transactions through its Onyx (now rebranded as Kinexys) blockchain system to meticulously screen transactions. This setup helps maintain regulatory compliance while allowing clients to securely access digital assets on the platform.
2. Enhancing Crypto-Specific Due Diligence and Compliance
To align with global AML and KYC standards, banks must implement robust due diligence procedures tailored to crypto transactions before adding them into their offerings. While reports suggest that new Bank Secrecy Act (BSA)/AML guidelines may emerge in 2025, no official confirmation has been made.
However, financial institutions must proactively strengthen their compliance measures by-
- Screening for illicit transactions by using blockchain analytics, which can help detect suspicious activities and prevent money laundering.
- Ensuring regulatory reporting compliance as per the FATF’s Travel Rule that mandates sharing sender and receiver information for crypto transactions.
- Verifying beneficial ownership by conducting enhanced due diligence (EDD) for high-risk crypto transactions.
- Ensuring continuous monitoring with automated risk detection using AI-driven transaction analysis tools.
3. Vendor and Partner Assessment
Banks must carefully vet technology providers and crypto partners before integration or partnerships. For example, SEBA Bank in Switzerland employs a rigorous vendor management framework tailored to blockchain service providers, with enhanced due diligence for critical infrastructure partners.
Some evaluations include,
- Verifying that the partners meet and maintain security certification requirements, such as SOC 2 compliance and other relevant security standards.
- Evaluating the financial health and sustainability of the potential partners for long-term partnerships.
- Conducting thorough code reviews and security audits for blockchain-based solutions.
- Monitoring their performance regularly against the service level agreements (SLAs).
4. Strengthening Custody Risk Controls
Crypto custody presents unique security challenges, requiring banks to implement advanced risk controls to safeguard digital assets. While many custodians voluntarily comply with SOC 2 Type 2 security standards, it is not yet a mandatory regulatory requirement.
However, banks must go beyond standard security measures to enhance security. Some of these measures includes,
- Using multi-party computation (MPC) to enhance security for private key management and prevent unauthorized access. It distributes private key fragments across separate systems, eliminating single points of failure.
- Implementing cold storage solutions to store assets offline and reduce their exposure to online cyber threats and attacks.
- Adhering to Basel crypto-asset exposure guidelines for regulatory compliance, particularly in capital adequacy and risk-weighted asset classification.
5. Regulatory Compliance Frameworks
Banks need to establish comprehensive compliance programs tailored to digital assets. This can be achieved by incorporating advanced regulatory technology (RegTech) solutions to enhance efficiency and accuracy.
Some of the key components for banks to establish comprehensive compliance programs specific to digital assets include,
- Utilizing RegTech tools to monitor and adapt to evolving crypto regulations across jurisdictions.
- Implementing automated systems for regular compliance testing and assessing adherence to regulatory requirements.
- Creating cross-functional working groups by bringing together legal, compliance, and business teams to address regulatory challenges procatively.
Mitigating financial crime risks in the age of cryptocurrency requires a multi-layered approach. Download our whitepaper to explore structured frameworks for crime prevention.
Conclusion
The integration of cryptocurrency services into banking operations requires a comprehensive risk management strategy that balances innovation with regulatory compliance. As banks expand their offerings, they must proactively enhance compliance frameworks, strengthen custody controls, and leverage blockchain analytics to mitigate risks.
Anaptyss helps financial institutions navigate these complexities with expert-driven insights and tailored solutions. Explore more on crypto compliance, risk mitigation, and financial crime prevention through our in-depth blogs and whitepapers.
