Why crypto exposure matters beyond crypto firms

Much of the attention surrounding cryptoassets has focused on regulation in recent years, particularly as the UK moves towards a more comprehensive framework for the sector. Financial crime teams are now encountering cryptoassets through day-to-day activityrather than regulatory change, whether through customer funds originating from crypto investments, sanctions investigations involving wallet analysis or source of wealth reviews requiring firms to establish how digital assets have been acquired, transferred or converted.

As digital assets become more integrated into the wider financial system, crypto exposure is no longer confined to firms operating directly in the sector. Banks, wealth managers, payment firms and other financial institutions are now required to consider how cryptoassets feature within existing financial crime processes, often through routine customer interactions rather than specialist crypto-related activity. Understanding where those exposures arise, how they should be assessed and whether existing controls remain appropriate is becoming an important part of financial crime risk management.

Assessing cryptoasset financial crime risk

Many of the financial crime risks associated with cryptoassets will already be familiar to firms. Questions around source of wealth, customer due diligence, sanctions exposure and suspicious activity remain unchanged, but the information available to support those assessments can look different when digital assets are involved.

Financial crime teams are expected to make sense of wallet activity, blockchain transaction histories and cryptoasset flows alongside more traditional sources of information. Establishing where funds originated, how assets have moved and whether there are links to known services or high-risk activity can provide valuable context, but that information still needs to be assessed alongside the wider customer relationship.

Sanctions assessments frequently highlight the limitations of relying on blockchain data alone, and the existence of a connection between a wallet and another address, exchange or service does not automatically indicate a financial crime concern. The significance of that connection will depend on factors such as when the activity occurred, the nature of the exposure and whether there is other information that changes how the risk should be viewed. Reaching that judgement remains a matter of investigation rather than simply data gathering.

Developments in blockchain attribution, law enforcement action and sanctions designations can also change the information available to firms over time. Risk assessments that were reasonable when a customer was onboarded may need revisiting as new intelligence emerges, particularly where firms have significant exposure to digital assets or higher-risk customer populations.

Using blockchain analytics to investigate financial crime

Crypto-related investigations often generate far more information than a traditional financial crime review. Transaction histories, counterparties and asset flows can often be traced across multiple wallets, helping firms build a picture of how funds have moved through different services, exchanges and networks over time.

Although blockchain analytics tools can provide a detailed picture of wallet activity and identify links to exchanges, services and potentially higher-risk counterparties, that visibility rarely provides a definitive answer in itself. Determining the purpose of a transaction, understanding the source of funds and assessing the relevance of particular activity still requires investigation, judgement and an understanding of the wider customer relationship.

Assessing indirect exposure can be particularly challenging where a wallet has interacted with hundreds or even thousands of counterparties over time, some of which may themselves have links to higher-risk activity. Determining which connections merit further investigation and which are simply part of the wider transaction ecosystem is rarely straightforward.

Where firms are dealing with thousands of counterparties, multiple layers of exposure and large volumes of blockchain data, identifying what matters can be harder than obtaining the information itself. Many alerts will ultimately prove benign, making decisions about what to investigate, what to escalate and what to record as acceptable risk heavily dependent on investigator judgement and a clear understanding of the firm's overall risk appetite.

How firms are managing cryptoasset financial crime risk

While crypto-related financial crime is often discussed in the context of firms operating directly within the cryptoasset sector, many of the same issues now arise within more traditional financial institutions. Customer exposure may become apparent during source of wealth reviews, transaction investigations, onboarding processes or routine interactions involving cryptoasset exchanges, even where the institution itself has no direct involvement in digital asset services. 

As digital assets become more widely used, relationship managers, onboarding teams and financial crime specialists are encountering crypto-related activity as part of their existing responsibilities rather than through dedicated crypto propositions. Understanding where that exposure exists within the business is becoming more important as cryptoasset use becomes more common among customers.

Broad assumptions about crypto-related activity are often less useful than understanding how a particular customer is using digital assets. Someone investing through an established exchange will typically present a different risk profile from a customer using privacy-enhancing technologies, decentralised finance protocols or services connected to higher-risk jurisdictions. The underlying activity, rather than the simple presence of cryptoassets, is frequently what drives the risk assessment.

Understanding those differences is often more valuable than treating all crypto-related activity in the same way. The quality of an assessment is likely to depend less on whether cryptoassets are involved and more on whether firms have sufficient visibility of how they are being used, where funds originate and what risks may be associated with the activity concerned.

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What should firms be focusing on now?

The increasing adoption of cryptoassets means financial crime teams are encountering digital assets through existing customer relationships, onboarding activity, source of wealth assessments and transaction monitoring processes. As a result, crypto-related activity can no longer be viewed in isolation from broader financial crime risk, with decisions around onboarding, enhanced due diligence, sanctions exposure and transaction monitoring often requiring firms to assess digital asset activity alongside more traditional sources of information.

Reviewing risk assessments, monitoring arrangements and investigative processes against current crypto-related risks can help firms understand whether existing controls remain appropriate. For some organisations, that exercise may identify gaps in knowledge or visibility. For others, it may provide reassurance that current frameworks already capture much of the activity being encountered.

For more information on crypto-related financial crime risk, contact Sam Haskins, Adrian Morris or Tom Aspin.