Welcome to our institutional newsletter, Crypto Long Short. This week:
- Nilmini Rubin explores the challenges cryptocurrencies and traditional markets face in creating hybrid, shared governance structures.
- Meredith Fitzpatrick explains how financial institutions must fundamentally rethink AML risk as cryptocurrencies and TradFi converge.
- Top Stories Agencies Should Watch By Francisco Rodrigues.
- Maple loans surged above $1 billion on this week’s charts.
-Alexandra Levis
Expert Insights
Governance is the true first layer
By Nilmini Rubin, Chief Policy Officer, Hedera
When Silicon Valley Bank collapsed in 2023, billions of dollars in reserves were trapped in the bank, and USDC briefly lost its peg to the U.S. dollar. The impact spread quickly, bringing markets to a standstill, repricing assets in trading and triggering a broader shock to confidence. While regulators conduct stress tests on traditional markets, the incident exposed a new risk, namely that the failure of traditional finance could directly impact digital assets.
This incident raises some fundamental questions: What happens if the risk moves in the other direction (from crypto to traditional markets): who intervenes, who absorbs the losses, and how to restore market confidence?
As blockchain begins to underpin financial markets, the next phase of digital assets will be defined not only by innovation, but also by coordinated accountability. This responsibility is determined by the way the network is designed.
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For years, the blockchain debate has revolved around a familiar divide: public versus private networks.
Permissionless networks can maximize openness and censorship resistance, but may struggle to cope with coordinated upgrades, regulatory consolidation, or emergency intervention. Private systems emphasize control and compliance rather than neutrality and interoperability.
As institutional adoption accelerates, hybrid models are becoming the solution of choice.
Hybrid architecture combines 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. The next major challenge for blockchain is to coordinate accountability beyond just public or private choices.
Blockchain architecture is increasingly moving towards a hybrid governance model.
When governance is in crisis
In complex systems, responsibilities are often defined before problems arise. Participants know who has authority, who bears losses, and how to handle emergencies.
Blockchain networks should start with this clarity. Effective governance will face difficult tests when sanctions enforcement, agreement failure or market collapse bring pressure.
The industry is already seeing early signs. During the March 2020 market crash, when failed auctions wiped out millions of dollars in value, MakerDAO needed urgent intervention. Agreements are restored, but we cannot allow these events to occur with frequency and at scale. In other cases, networks use coordinated forks to address hacking or illegal activity, but only after the fact.
As tokenization expands, increasing resilience will require governance systems that can anticipate crises and define decisions forward Can be effectively mitigated after an incident occurs.
Test governance
Mature financial systems regularly stress-test their governance structures to ensure they are resilient before disruptions occur.
Hybrid networks must bring this rule onto the chain. Governance stress testing can help the industry prepare for scenarios such as stablecoin volatility, regulatory shifts, and AI-driven governance dynamics by clarifying roles, aligning incentives, and enhancing coordination under stress.
Governance is the true first layer
Digital assets are reimagining ownership and engagement. The next challenge is to apply that same creativity to governance.
The network that survives will not be the one with the most tokens or the fastest throughput. They will be the ones who know how to govern effectively when the system is under stress.
This week’s top stories
——Francisco Rodriguez
The cryptocurrency industry continues to navigate the regulatory system this week, entering the mortgage market while also appearing to be blocked from offering yields on stablecoin balances. Even as prices drop, other major developments further build trust in the industry.
Expert opinion
The New Financial Order: Update on Cryptocurrencies’ TradFi Risks
—Meredith Fitzpatrick, partner and head of cryptocurrency at Forensic Risk Alliance
The convergence of traditional finance and cryptocurrencies is no longer theoretical science fiction—it’s here. Regulatory clarity across major jurisdictions is accelerating institutional entry into digital assets, from Europe’s Market in Crypto-Assets (MiCA) framework to expanding U.S. legislative momentum through the U.S. Stablecoin Guidance and Establishing National Innovation (GENIUS) Act. For financial institutions, the question is no longer whether to participate in cryptocurrencies, but how to participate safely.
The critical mistake many institutions make is viewing cryptocurrencies as an extension of existing products. It’s not. Cryptocurrencies fundamentally change the way anti-money laundering (AML) risks are assessed, monitored and controlled.
At its core, blockchain introduces three defining characteristics: immutability, pseudonymity, and borderless value transfer. These reshape financial crime risk and the tools needed to manage it.
Control transfers from account to key
In traditional finance, assets are secured through centralized systems and reversible transactions. In cryptocurrencies, control rests with private keys. When institutions provide custody, anti-money laundering risks are inseparable from cybersecurity risks. Key leakage is not just a destruction, but an irreversible transfer of value that is often irreversible. This requires controls such as multi-signature authorization, cold storage, strict access governance and wallet isolation – all of which sit outside traditional anti-money laundering frameworks but are critical to mitigating risk.
Non-custodial wallet means dynamic risk assessment
Traditional anti-money laundering relies heavily on customer identity and static risk analysis. In the cryptocurrency world, this model breaks down. Customers can transact via non-custodial wallets that exist outside institutional access frameworks, and illegal activity is often hidden in transaction behavior rather than identity.
Therefore, the risk assessment must shift from “who the customer is” to “what the wallet does”. This requires constant monitoring of on-chain activity, including exposure to high-risk counterparties, mixers, and decentralized protocols. Risk becomes dynamic rather than cyclical.
Cryptocurrency financial crime structure becomes more complex
Cryptocurrency money laundering may involve newer techniques such as chain hopping and privacy-enhancing techniques such as the use of mixers, which have no direct similarities in traditional finance. Transactions can traverse multiple jurisdictions within minutes, making traditional screening systems inadequate. Effective anti-money laundering now depends on blockchain intelligence: the ability to track funds, identify direct and indirect risks to risky parties, and interpret transaction patterns across networks.
These shifts require corresponding developments in governance and risk management. Boards of directors and risk committees must redefine risk appetite to reflect cryptocurrency-specific risk exposures. Institutions should introduce specialized teams (such as digital asset approval committees and high-risk client groups) to manage rapidly changing risks.
Most importantly, enterprise-wide risk assessment (EWRA) must become dynamic. In an environment where risk profiles may change from a single transaction, static point-in-time assessments are insufficient.
The following table illustrates how the customer risk assessment must develop:
focus areas |
traditional finance |
cryptocurrency |
|---|---|---|
| customer identity | Typically, identification and verification are done through the use of government-issued identification, physical address, and relevant databases (such as credit history). | Most centralized virtual asset service providers (VASPs) have KYC/CDD/EDD procedures like TradFi institutions. However, “non-custodial wallets” (wallets in which users retain control of their private keys) exist outside of a centralized authority that collects KYC. In this case, on-chain activities can be used when assessing a client’s risk. |
| risk indicators | Based on factors such as employment, income, geographic location, and transaction history with the institution. | Based on wallet behavior, age, counterparties, interactions with high-risk services (such as mixers) and exposure to certain smart contracts, non-custodial wallets or DeFi platforms. |
| Transparent transactions | Transaction data is private and accessible through internal bank records. | On-chain transactions are public and open to advanced analysis, but only to those with the tools and expertise to interpret them. |
| Dynamic risk monitoring | Risk profiles are typically static or updated periodically. | Based on real-time blockchain analysis and continuous monitoring, risk may change dynamically with wallet activity. |
Finally, organizations must invest in new capabilities. Fluency in blockchain analytics for transaction monitoring and forensic investigations are no longer niche skills – they are core anti-money laundering capabilities. Most organizations require a hybrid model that combines internal expertise with external experts.
Professionals in the field must recognize that cryptocurrency compliance is more than just adapting to existing frameworks and requires a fundamentally different approach to transaction monitoring, due diligence and incident investigation. Success requires compliance teams to understand traditional regulatory requirements and cryptocurrency-specific investigative challenges. Institutions that approach cryptocurrency adoption with appropriate forensic rigor—viewing it as a fundamental compliance transformation rather than a simple product addition—will be best positioned for sustainable success.
Chart of the week
Maple loans surge past $1 billion with record single-day issuance volume of $350 million
Last week, Maple’s outstanding loans jumped above $1 billion, with the protocol disbursing $350 million in loans in a single day. With total AUM currently exceeding $4.6 billion, there is a divergence between the protocol’s strong fundamentals and the associated SYRUP token price action. This growth continues to highlight the resilient demand for institutional-grade loans from crypto-native companies despite broader market conditions.
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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.
