Introduction
As virtual assets become an increasingly attractive asset class and global regulation around them matures, the timing is ideal for traditional financial (TradFi) institutions to explore and capitalise on opportunities in this space—now with reduced levels of risk.
Financial institutions have long operated under stringent regulatory oversight. These regulations are essential—not only to protect consumers from fraud and misconduct, but also to ensure the stability and resilience of the broader financial system.
TradFi regulation has evolved over decades, usually in response to crises that expose gaps and vulnerabilities. For example, the 2008 global financial crisis, triggered by excessive risk-taking, led to the collapse of major institutions and unprecedented government bailouts. It also exposed the fragile and highly interconnected nature of the financial ecosystem.
This crisis acted as a catalyst for innovation. One major development was the release of the Bitcoin whitepaper, which proposed a decentralised, peer-to-peer financial system that removed the need for trusted intermediaries.
Ironically, while Bitcoin was designed to disintermediate finance, it gave rise to a new wave of centralised entities—Virtual Asset Service Providers (VASPs)—offering exchange, custody, and transfer services in the digital asset space.
The Evolving Regulatory Landscape
In the early years, VASPs operated largely without regulation. This regulatory void accelerated growth but also opened the door to significant risks, including fraud, money laundering, and major financial losses for retail investors.
In response, several jurisdictions—such as Gibraltar, Malta, and Bermuda—established bespoke regulatory frameworks aimed at attracting VASP business while introducing oversight.
A major shift came in 2018 when the Financial Action Task Force (FATF) extended its Recommendation 16 to include virtual assets and VASPs. This required jurisdictions adhering to FATF standards to regulate or license VASPs and apply anti-money laundering and counter-terrorism financing (AML/CFT) obligations.
More recently, following high-profile VASP failures, regulators have begun focusing on consumer protection and applying financial conduct rules akin to those seen in TradFi. This is gradually aligning VASPs with the same expectations and standards familiar to traditional institutions.
Crypto Is No Longer Optional
Traditionally, most financial institutions have steered clear of digital assets due to unclear regulations and perceived high risks. Some policymakers and industry leaders hoped the crypto trend would fade. It hasn’t—and ignoring it is no longer a viable strategy.
Crypto and TradFi are becoming increasingly interconnected. A key milestone was the U.S. SEC’s approval of spot Bitcoin ETFs in early 2024, which saw immediate market impact and demonstrated strong demand from traditional investors.
Exposure to digital assets—whether direct or indirect—is becoming unavoidable. For compliance professionals and risk managers in TradFi, developing a strong understanding of crypto and its risks is now a prudent necessity.
1. Servicing VASPs
VASPs require access to banking and financial services, yet many TradFi institutions still hesitate to engage with them. This reluctance stems from concerns around compliance risks, reputational exposure, and potential fallout with correspondent banking partners. In some jurisdictions, regulators have outright restricted banks from servicing VASPs.
However, as regulation improves and compliance standards mature, the risk profile of VASPs is steadily improving. This opens up meaningful opportunities for TradFi to diversify their client base and tap into an underserved and growing market—provided they understand and appropriately manage the risks involved.
2. Becoming VASPs
TradFi firms are well positioned to offer virtual asset services—such as trading, custody, and transfers—directly. With robust compliance frameworks and established customer relationships, TradFi institutions can enter this market with built-in advantages, including scale and trust.
In regions like the European Union, regulatory developments favour TradFi participation. Under the upcoming Markets in Crypto-Assets (MiCA) regulation, licensed financial institutions may only need to notify regulators before offering crypto-related services—bypassing more onerous authorisation processes. This could accelerate market entry and enable firms to passport services across the European Economic Area (EEA).
3. Leveraging Blockchain Technology
TradFi has long expressed interest in blockchain, the underlying technology behind virtual assets. Distributed Ledger Technology (DLT) offers enhanced efficiency, transparency, and reduced operational costs. A key focus is tokenisation—the process of representing real-world assets (RWAs) like securities or real estate on the blockchain.
Major players such as BlackRock are already exploring tokenised investment products, with recent regulatory filings suggesting growing institutional momentum in this space.
Virtual assets and the broader adoption of DLT are rapidly reshaping the financial landscape. TradFi institutions that fail to engage risk falling behind their peers and missing out on transformative opportunities.
Crypto exposure is no longer a question of if, but how. With trust in VASPs still fragile following past failures, TradFi has a unique opportunity to step in, leveraging its regulatory experience, operational resilience, and established client trust.
As regulations evolve and risks become more manageable, TradFi institutions can confidently expand their offerings into digital asset services. The primary barrier remains knowledge. Educating boards, senior management, and compliance teams is critical for firms that want to enter the space safely and strategically.
Now is the time for TradFi to act. Those who move early and wisely will be best positioned to lead in the financial system of the future.
