Key takeaways

• Digital assets are reshaping traditional finance: Financial institutions are expanding beyond viewing crypto as a speculative asset class to exploring tokenization, stablecoin settlement, and real-time treasury management.
• Regulatory scrutiny is accelerating: Programs like the Federal Reserve’s Novel Activities Supervision Program signal growing expectations for banks to demonstrate robust risk management in digital asset activities.
• Blockchain intelligence is now essential infrastructure: From asset management to securitized lending, on-chain data and behavioral intelligence help financial institutions uncover hidden risks, satisfy compliance requirements, and preserve reputation.

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Executive summary

Often, the full breadth of use cases for financial innovations is not clear at their inception. The institutionalization of blockchain technology is evolving at a rapid pace, but in the late 2010’s, forward leaning financial institutions' strategy around Bitcoin was primarily isolated (with some exceptions) to the view that crypto was an asset class. Here, the idea was markets wanted access to Bitcoin to diversify their wealth portfolio and take advantage of higher yields in a low-rate world. Financial institutions are now broadening the list of digital asset use cases to include a medium of exchange, settlement and the idea of tokenizing real world securities and assets.

In recent years, institutions are continuing to experiment with these ideas and increasing the number of potential use cases for blockchain technology, even while crypto asset market prices have remained well below previous year highs. Recently, Citi announced the creation of a new service that would leverage blockchain technology and smart contracts to improve cash management liquidity and trade finance applications through tokenized deposits on private/permissioned networks. In the same month, Visa announced it was expanding into stablecoin settlement capabilities on the Solana blockchain to modernize cross-border money movement. Other large institutions such as Goldman Sachs, JP Morgan, HSBC, and State Street are already well on their way to establishing a mature and sophisticated strategy for using blockchain technology.

One month prior, however, the Federal Reserve Board (“Fed”) made another announcement that may have the largest impact on financial institutions and how they design emerging digital asset strategies. The announcement stated that the Fed had established the Novel Activities Supervision Program to enhance the supervision of novel activities, inclusive of activities related to crypto assets.

As regulators’ familiarity with digital assets grows, so does the pressure on financial institutions to demonstrate how they mitigate digital asset business risks. TRM Labs has compiled a list of the use cases where we see traditional financial institutions (“FI’s”) having connectivity to digital assets and how our platform can help institutions perform business activities in a safe and sound manner while meeting regulatory scrutiny.

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Asset management

Digital asset businesses (e.g. crypto exchanges, crypto-to-fiat payment processors, industrial mining firms, tokenization platforms, etc.) looking to deposit fiat treasury funds at traditional FI’s for diversification, interest yields or FX needs.

Compliance considerations and tools

FI’s will need to conduct a thorough risk assessment on the digital asset business, considering factors such as whether they’re facilitating unlicensed activity, what jurisdictions they are operating in, whether deposits stem from retail users or corporate funds and the strength of their AML controls. Additionally, augmenting existing KYC (i.e. CDD/EDD) processes by providing on-chain threat intelligence (e.g. sanctions exposure) on digital asset businesses is an effective way to diligence new businesses in an existing framework. TRM’s platform helps uncover the risks digital asset businesses present to help mitigate regulatory and reputational risks.

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Private wealth

Prospecting and servicing high-net-worth individuals who have a material portion of their source of wealth derived from crypto related activities or companies (e.g. executive at an exchange, token creator, long-time crypto trader, staking, lending, etc.).

Compliance considerations and tools

Where the prospect provides certain crypto-identifiers, blockchain intelligence products can assist in verifying the source of funds, ensuring the prospect’s narrative is consistent with actual, on-chain transactional activity and reviewing for potential illicit finance exposure. In many ways, this process can be more effective and determinative than attestations or documentation from prospects. Additionally, where prospects may be senior executives at crypto entities, TRM’s off and on-chain information can be used to ensure that the company is not operating in an untoward or illegal manner, enabling the FI to evaluate reputational risk for taking on customers from businesses that regulators view as higher risk.

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Investment banking / financing

Digital asset businesses often require traditional corporate or investment banking services to grow and continue their operations (e.g. M&A, financing, underwriting, advisory services, etc.).

Compliance considerations and tools

Similar to asset management, augmenting existing enhanced due diligence processes with on-chain data enables FI’s to understand the full extent of risks that the institution may face in providing financing or advisory services to a crypto-related entity. Committees focused on reputational risk can utilize a standardized assessment framework that incorporates on-chain risk and threat intelligence to assist in navigating complex situations, especially when regulatory guidelines are ambiguous.

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Securitized lending

As crypto markets stabilize and the use of stablecoins (e.g. USDC) become more prevalent, financial institutions may consider extending a securitized fiat loan to an entity (e.g. large crypto exchange, high-net-worth individual, etc.) who uses stablecoin or other digital assets as collateral.

Compliance considerations and tools

With TRM, compliance teams can utilize wallet screening and/or forensics tracing abilities to screen the initial collateral deposit made in crypto assets, as well as subsequent margin calls, for any illicit or unexpected exposure. Additionally, in the event that the collateral has sanctions exposure, FI’s can design freezing, blocking and/or segregating tainted asset procedures with its custodian in order to fully comply with sanctions regulations.

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Digital asset custody services

Many institutions around the globe are considering strategies where their customers would be able to buy, sell and transfer a small number of crypto assets, such as Bitcoin, Ethereum and USDC. Institutions providing the infrastructure and/or services for customers to transact in these digital assets would have the full breadth of transaction monitoring and sanction screening obligations.

Compliance considerations and tools

TRM’s platform provides FI’s with a suite of capabilities that can be used to meet these regulatory obligations. This includes a fully customizable risk engine containing over 150 different risk scenarios such as direct and indirect linkages to predicate offenses to money laundering. Settings in the risk engine will inform risk ratings for entities and wallet addresses throughout the platform. Additionally, TRM’s platform includes a comprehensive transaction monitoring case management and surveillance product to meet AML and SAR reporting requirements, metrics dashboards, customizable alert rule design, audit trail histories, and investigative tracing tools that flag behavioral anomalies using next-gen

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Frequently asked questions (FAQs)

1. What are common digital asset use cases for financial institutions?

Financial institutions are exploring use cases such as tokenized deposits, stablecoin-based settlement, crypto-backed lending, and direct custody services for digital assets like Bitcoin, Ethereum, and USDC.

2. How do financial institutions manage compliance when serving crypto-native clients?

Banks use enhanced due diligence and on-chain intelligence to screen wallet addresses, assess sanctions exposure, and evaluate AML practices before engaging with digital asset businesses.

3. Why are stablecoins relevant for traditional finance?

Stablecoins like USDC offer near-instant settlement and programmable finance benefits, making them attractive for collateral, liquidity, and cross-border transactions within regulated environments.

4. What regulatory changes are impacting banks’ crypto strategies?

The Federal Reserve’s Novel Activities Supervision Program increases oversight on crypto-related services, requiring institutions to demonstrate safe and sound practices with emerging digital asset products.

5. How does TRM help financial institutions manage digital asset risk?

TRM provides a customizable platform with blockchain intelligence, wallet screening, transaction monitoring, and behavioral anomaly detection to meet AML, SAR, and sanctions requirements.

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About TRM Labs

TRM Labs provides blockchain analytics solutions to help law enforcement and national security agencies, financial institutions, and cryptocurrency businesses detect, investigate, and disrupt crypto-related fraud and financial crime. TRM’s blockchain intelligence platform includes solutions to trace the source and destination of funds, identify illicit activity, build cases, and construct an operating picture of threats. TRM is trusted by leading agencies and businesses worldwide who rely on TRM to enable a safer, more secure crypto ecosystem.

TRM is based in San Francisco, CA, and is hiring across engineering, product, sales, and data science. To learn more, visit www.trmlabs.com.