The UK government recently published draft amendments to the Money Laundering Regulations 2017 (MLRs), marking another important step in the maturing of the anti-money laundering / counter-terrorism financing (AML/CTF) framework for crypto assets. For compliance teams, among the most consequential provisions is the proposed new Regulation 34A, which requires crypto asset exchange providers and custodian wallet providers to apply enhanced due diligence measures when entering into, or maintaining, correspondent relationships.
The addition of Regulation 34A is significant because it brings crypto asset firms into closer alignment with their traditional financial institution counterparts. The regulations make clear the expectations that crypto businesses must manage financial crime risks to the same standard as their traditional finance counterparts.
Understanding correspondent relationships
Correspondent relationships allow one institution (the “correspondent”) to provide services on behalf of another (the “respondent”), most commonly facilitating the movement of funds for the respondent’s clients. These arrangements are frequently cross-border, enabling smaller or locally focused firms to access global payment networks and services otherwise beyond their reach.
In the crypto ecosystem, correspondent-style arrangements include nested exchanges and OTC desks, custodian–subcustodian models, and crypto-enabled remittance flows. These models are essential for market connectivity and liquidity, but the very features that make them valuable — their cross-border and multi-institutional nature — also increase exposure to financial crime risk.
What are the risks of correspondent relationships?
Correspondent relationships inherently introduce a degree of separation between the service provider and the ultimate customer or end user. This creates risk, particularly in scenarios where the correspondent provides services to a customer without having conducted its own due diligence. Often, correspondents will choose instead to rely on their respondents’ — the provider directly interfacing with the customer or end user — own controls in managing the financial crime risks associated with the customer; the correspondent will then operate a suite of “overlay” controls over the top.
Typically, this “reliance model” is managed through periodic reviews as part of ongoing monitoring and customer attestations — but such measures can be limited in scope. The new regulation makes an explicit requirement for correspondents to actively assess the robustness of respondents’ AML and CTF control frameworks. In practice, this requires evidence-based evaluation over paper-based assurances.
How can blockchain intelligence help?
Blockchain intelligence provides unique insight that helps teams mitigate the risks presented by correspondent relationships. While traditional assessments determine the adequacy of policies and procedures, they rarely demonstrate how effectively those controls are working in practice. The transparency of blockchain transactions allows correspondents to test and validate controls against observed on-chain activity, and identify control areas that require greater scrutiny in the correspondent’s onboarding or on-going assessments.
For example, while onboarding a prospective new respondent, an analyst might identify that a cluster of recent withdrawals were made from addresses linked to sanctioned actors. Such findings would not only prompt immediate follow-up regarding the specific transactions themselves, but also allow the correspondent to target specific questions about the respondent’s sanctions screening framework and its effectiveness in preventing prohibited transfers.
By combining conventional, document-based assessments with the advantages of blockchain transparency and overlaid intelligence, correspondents can focus on risks as they actually materialize. This shifts the exercise from abstract compliance to applied risk management, embodying global regulators’ calls for financial crime controls to be rooted in a risk-based approach.
An obligation and an opportunity
The MLR draft amendments should be seen not only as a new compliance obligation for crypto firms, but also as a catalyst for stronger AML/CTF standards to bolster industry confidence in the crypto ecosystem. By requiring firms to scrutinize their counterparties with greater depth, Regulation 34A reinforces the message that crypto asset businesses are expected to operate with the same rigor as established financial institutions.
Blockchain intelligence plays a central role in this shift. By applying data-driven analysis to respondent relationships — leveraging the inherent transparency of blockchains to gain visibility into real-time risks as they arise — firms can identify how controls are working in practice, proactively address weaknesses, and provide assurance to regulators and banking partners alike.
In short, crypto businesses can move beyond reactive compliance to positioning themselves as trusted, resilient participants in the international financial system.
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