Welcome to our institutional newsletter, Crypto Long & Short. This week:
- Nilmini Rubin on the challenge for crypto markets and traditional markets to create a hybrid, shared governance structure.
- Meredith Fitzpatrick covers how financial institutions must fundamentally rethink AML risk as crypto and TradFi converge.
- Top headlines institutions should be aware of by Francisco Rodrigues.
- Maple loans rise above $1 billion in Chart of the Week.
-Alexandra Levis
Expert insight
Governance is the real layer 1
By Nilmini Rubin, Chief Policy Officer, Hedera
When Silicon Valley Bank collapsed in 2023, USDC briefly lost its dollar peg after billions in reserves were trapped in the bank. The effect spread quickly, halting markets, repricing assets mid-transaction and triggering a wider confidence shock. As regulators stress-test traditional markets, this event revealed a new risk where failures in traditional finance can directly affect digital assets.
This episode raised fundamental questions about what happens if risk moves in the other direction, from crypto to the traditional market: who intervenes, who absorbs losses, and how is confidence in the markets restored?
As blockchains begin to underpin financial markets, the next phase of digital assets will be defined not just by innovation, but by coordinated accountability. That accountability is shaped by how networks are designed.
The false binary
For years, blockchain debates revolved around a familiar distinction: public vs. private networks.
Permissionless networks maximize openness and censorship resistance, but may struggle with coordinated upgrades, regulatory integration or emergency intervention. Private systems emphasize control and compliance over neutrality and interoperability.
As institutional adoption accelerates, hybrid models are emerging as the preferred solution.
Hybrid architectures combine public verifiability with open participation and predictable governance. This makes them more suitable for regulated use cases and compliance frameworks that require greater transparency and clear roles. Coordinated accountability, rather than just public or private choices, is blockchain’s next big challenge.
Blockchain architecture is increasingly converging towards hybrid governance models.
When governance meets crisis
In complex systems, responsibilities are usually defined before problems arise. Participants know who has authority, who absorbs losses, and how emergencies are handled.
Blockchain networks should begin with that level of clarity. When stress comes through sanctions enforcement, protocol failures or market crashes, effective governance proves a difficult test.
The industry has already seen early signs. During the March 2020 market crash, MakerDAO required emergency intervention after auction errors wiped out millions in value. The protocol was restored, but we cannot allow these incidents to occur with frequency and scale. In other cases, networks have used coordinated forks to address hacks or illegal activity, but only after the fact.
As tokenization expands, increased resilience will require governance systems that anticipate crises and define decision-making before an incident occurs to effectively mitigate.
Putting governance to the test
Mature financial systems routinely stress test their governance structures to ensure resilience well in advance of moments of disruption.
Hybrid networks must bring this discipline to the chain. Governance stress tests clarify roles, align incentives and strengthen coordination under pressure, helping the industry prepare for scenarios such as stablecoin volatility, regulatory change and AI-driven governance dynamics.
Governance is the real layer 1
Digital assets restore ownership and participation. The next challenge is to apply the same creativity to governance.
The networks that endure will not be the ones with the most tokens or the fastest throughput. They will be the ones who know how to manage effectively when the system comes under pressure.
This week’s headlines
– By Francisco Rodrigues
The crypto industry has continued to navigate the regulatory system this week and is entering the mortgage market, while also apparently being stopped from offering returns on stablecoin balances. Other major developments are building further confidence in the industry even as prices fall.
Expert perspectives
The new financial order: TradFi risk update for crypto
– By Meredith Fitzpatrick, Partner and Head of Cryptocurrency, Forensic Risk Alliance
The convergence of traditional finance and cryptocurrency is no longer theoretical sci-fi – it’s here. Regulatory clarity across major jurisdictions is accelerating institutional access to digital assets, from Europe’s Markets for Crypto Assets (MiCA) to expanding US regulatory momentum with the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act. For financial institutions, the question is no longer whether to engage in crypto, but how to do so safely.
The critical misstep that many institutions make is to treat crypto as an extension of existing products. It isn’t. Crypto fundamentally changes how anti-money laundering (AML) risk must be assessed, monitored and controlled.
At its core, blockchain introduces three defining properties: immutability, pseudonymity, and limitless value transfer. These are reshaping both the risk of financial crime and the tools needed to deal with it.
Change of control from accounts to keys
In traditional finance, assets are secured through centralized systems and reversible transactions. In crypto, control rests with private keys. When institutions offer custody, AML risk becomes inseparable from cybersecurity risk. A compromised key isn’t just a breach – it’s an irreversible transfer of value, often beyond recovery. This requires controls such as multi-signature authorization, cold storage, strict access control and wallet segregation – all of which sit outside traditional AML frameworks but are critical to risk mitigation.
Non-depot funds mean dynamic risk assessments
Traditional AML relies heavily on customer identity and static risk profiling. In crypto, this model breaks down. Customers can transact through non-depot wallets that exist outside of institutional onboarding frameworks, and illicit activity often hides in transactional behavior rather than identity.
As a result, risk assessment must evolve from “who the customer is” to “what the wallet does.” This requires continuous monitoring of on-chain activity, including exposure to high-risk counterparties, mixers and decentralized protocols. Risk becomes dynamic, not periodic.
Crypto-economic crime is structurally more complex
Laundering cryptocurrencies can involve newer technologies, such as chain-hopping and the use of privacy-enhancing technologies as mixers that have no direct counterpart in traditional finance. Transactions can cross multiple jurisdictions in minutes, rendering the old screening systems inadequate. Effective AML now depends on blockchain intelligence: the ability to trace funds, identify direct and indirect exposure to risky parties, and interpret transaction patterns across networks.
These shifts require a corresponding development in governance and risk management. Boards and risk committees must redefine risk appetite to reflect crypto-specific exposures. Institutions should put in place specialized teams (eg digital asset approval committees and high-risk customer panels) to deal with rapidly changing risks.
Most importantly, Enterprise-Wide Risk Assessment (EWRA) must become dynamic. Static, point-in-time assessments are inadequate in an environment where risk profiles can change with a single transaction.
The table below illustrates how customer risk assessment should develop:
Focus area |
TradFi |
Crypto |
|---|---|---|
| The identity of the customer | Typically through identification and verification using government-issued IDs, physical addresses and relevant databases (eg credit history). | Most Centralized Virtual Asset Providers (VASPs) have KYC/CDD/EDD procedures as TradFi institutions. However, “non-depot wallets” (wallets where the user retains private key control) exist outside of a centralized body that collects KYC. In this case, on-chain activity can be used when assessing the customer’s risk. |
| Risk indicators | Based on factors such as employment, income, geography and transaction history with the institution. | Based on wallet behavior, age, transaction counterparties, interactions with high-risk services (eg mixers) and exposure to certain smart contracts, non-depot wallets or DeFi platforms. |
| Transaction Transparency | Transaction data is private and accessed via internal bank records. | On-chain transactions are publicly available, enabling advanced analysis, but only for those with the tools and expertise to interpret them. |
| Dynamic risk monitoring | Risk profiles are usually static or periodically updated. | Risk can change dynamically with wallet activity, based on real-time blockchain analysis and continuous monitoring. |
Finally, the institutions must invest in new capacities. Fluency in blockchain analytics for transaction monitoring and forensic investigation are no longer niche skills – they are core AML capabilities. Most organizations will require a hybrid model that combines internal expertise with external specialists.
Professionals in this field must recognize that cryptocurrency compliance is not simply about adapting existing frameworks, but requires fundamentally different approaches to transaction monitoring, due diligence and incident investigation. Success requires compliance teams to understand traditional regulatory requirements and crypto-specific investigative challenges. Institutions that approach crypto adoption with appropriate forensic rigor—treating it as a fundamental compliance transformation rather than simple product addition—will be best positioned for sustainable success.
Chart of the week
Maple loans rise to over DKK 1 billion. USD of a record 350 million. dollar one-day issue
Maple’s outstanding loans jumped back above $1 billion last week as the protocol issued $350 million in loans in a single day. With total assets under management now over $4.6 billion, there is a divergence between the protocol’s strong fundamentals and the associated SYRUP token price action. This growth, despite broader market conditions, continues to highlight the resilient demand for institutional-grade lending among crypto-native businesses.
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Note: The views expressed in this column are those of the author and do not necessarily reflect the views of CoinDesk, Inc., CoinDesk Indices, or its owners and affiliates.
