AML and Transaction Monitoring Requirements for Crypto-Friendly Banks

As banks deepen their involvement with crypto markets, regulators are no longer treating crypto exposure as a peripheral risk. Supervisory authorities now expect institutions to manage blockchain-based activity with the same discipline as traditional banking, while accounting for faster settlement, cross-border complexity, and new forms of financial crime.

This article provides a structured breakdown of how AML and transaction monitoring requirements are evolving for crypto-friendly banks, and what institutions must put in place to operate sustainably under increasing regulatory pressure.

Crypto-friendly banks are subject to much stricter AML requirements because they straddle the worlds of traditional banking and the crypto ecosystem, which both present strikingly different risk profiles. Legacy banking providers view operations in the crypto ecosystem as a threat to the fiat-based ecosystem on which the legacy banking system is built. The result was initial hostility and an increase in suspicion. The resulting regulatory discomfort is aggravated further by the types of money laundering risk that crypto transactions present and that AML measures need to address. Such risks are not limited to anonymity, but jurisdictional mixing, fast swaps of assets, and ever-evolving technologies that earlier AML rules were never meant to measure. Banks that engage with the crypto ecosystem must exhibit exceptionally high control standards to not just obtain a license but maintain it.

Core AML requirements for crypto banks extend beyond those applicable to traditional banks. They incorporate additional controls tailored to the specific risks posed by crypto assets, while still maintaining a banking-grade compliance regime.

Robust Compliance Infrastructure

Compliance functions are the foundation on which any bank operating in the crypto ecosystem must build. These functions must be well resourced and strategically positioned within an organisation’s decision-making hierarchy, rather than treated as a mere “tick-the-box” administrative formality.

A successful compliance function should support the acquisition of a licence and, more importantly, help prevent licence revocation in a regulatory environment where scrutiny intensifies daily.

Enhanced Customer Due Diligence

AML compliance requirements for crypto banks demand enhanced KYC standards rather than basic checks. Banks are required to collect and continuously reassess detailed customer information, including:

The relatively basic compliance procedures adopted by many crypto businesses during the industry’s largely unregulated phase may not fully satisfy these requirements. However, they often form an essential baseline for obtaining a licence.

AML Officer and Governance Structure

Regulatory frameworks require a robust governance structure that includes an appointed AML officer with a clear reporting line to senior management and the board of directors. The compliance function must remain independent and be sufficiently funded to implement necessary control measures without undue commercial pressure.

Suspicious Activity Reporting

Suspicious transactions must be reported in accordance with established thresholds and rules aligned with those of the relevant national authority. Crypto banks should also understand what constitutes standard suspicious behaviour within the crypto ecosystem, such as:

This understanding should inform decisions before proceeding with crypto transactions that expose the bank to elevated AML risk.

Record Keeping and Audit Trails

Transaction records must be retained for periods that meet AML regulatory requirements, typically five to seven years. Record keeping should allow for the reconstruction of transaction flows across both fiat and crypto rails, including scenarios in which customers switch between payment channels.

The transaction monitoring requirements for banks that operate in the crypto ecosystem demand systems with real-time monitoring capabilities, rather than those designed solely for traditional payment environments. These systems must be able to identify the risks specific to crypto transactions while accounting for the speed and volume characteristics of digital assets.

In practice, transaction monitoring for crypto-friendly banks combines automated monitoring systems, tools that analyse on-chain activity, and visibility across multiple platforms. Together, these capabilities enable institutions to detect and report suspicious transactions before they escalate into significant regulatory infractions.

Real-Time Monitoring Systems

Transactions in the crypto ecosystem occur at a digital pace, and transaction monitoring systems must be able to operate at the same speed. Suspicious activity should be flagged as it happens, without reliance on batch-processing models that introduce delays.

For institutions operating at scale, manual processes are not viable. NextPay alone processes just under one billion euros per month for clients in the crypto ecosystem, underscoring the need for automated, real-time monitoring.

Crypto-Specific Detection Scenarios

Transaction monitoring rules should be calibrated to address risks that are unique to the crypto ecosystem, rather than relying solely on scenarios designed for traditional financial crime. Banks should be particularly mindful of:

Adjusting detection scenarios to these risks is essential for effective oversight in crypto-related activity.

Cross-Platform Visibility

Observing activity only within the banking ecosystem may no longer be sufficient. Banks may need to monitor how clients move funds from the fiat ecosystem into the crypto ecosystem, exchange those funds for tokens, and then move the same funds or tokens back into fiat.

This requires tracking transactions across the full transaction chain, rather than monitoring activity in isolation. Cross-platform visibility enables banks to understand the complete flow of funds and identify risk patterns that would otherwise remain fragmented.

Volume and Velocity Controls

Crypto marketplaces are highly active and do not involve the day-long gaps or settlement delays typical of traditional clearing and exchange processes. As a result, there are many legitimate scenarios in which trading firms move large sums of money over very short periods of time.

Transaction monitoring systems must be updated to reflect these realities, without relying on traditional models for expected transaction volumes or velocities that may generate false positives in a crypto context.

Blockchain Analytics Integration

Leading players such as NextPay integrate their transaction monitoring systems with tools that provide extensive analysis of blockchain activity. These tools allow institutions to trace the origin of on-chain transactions, identify where services were obtained, and assess potential links to illicit activity associated with specific wallets.

Blockchain analytics can also provide risk scores for wallets and indicate whether they should be subject to further scrutiny before funds are moved onward to other wallets. While these tools significantly enhance traditional transaction monitoring capabilities, they are designed to complement existing fiat banking systems rather than replace them.

Crypto-friendly banks operate within a complex patchwork of anti-money laundering (AML) regulations across the EU, the US, and international jurisdictions. These frameworks differ in compliance expectations, reporting requirements, and enforcement styles, all of which directly affect the operational design and risk management strategies of crypto-friendly banks.

In some jurisdictions, regulators are highly focused and employ creative enforcement approaches to drive compliance, particularly at banks that have managed to balance the needs of the crypto ecosystem with traditional compliance requirements.

European Union: MiCA and AMLR

In the European Union, crypto-friendly banks and service providers face two major AML-related regulatory developments: the Markets in Crypto-Assets Regulation (MiCA) and the forthcoming Anti-Money Laundering Regulation (AMLR).

Despite this progress, many crypto pioneers remain ill-prepared for the level of scrutiny applied by central banks. MiCA introduces requirements that are broadly comparable to those applied to traditional financial institutions, including:

The forthcoming AMLR will further reshape the landscape by codifying requirements that are currently fragmented across EU member states. Once in force, it will eliminate the ability of nascent banks to select jurisdictions based on more lenient AML regimes.

While this abrupt transition will impose a significant compliance burden, it is also expected to accelerate the professionalization of the industry.

United States: FinCEN and the Bank Secrecy Act

In the United States, crypto-friendly banks must comply with rules issued by FinCEN under the Bank Secrecy Act (BSA). These requirements establish a comprehensive AML framework that includes:

The application of these rules to crypto-related activities remains a work in progress. FinCEN continues to assess which activities should trigger BSA registration and full compliance obligations for crypto-friendly banks. Institutions operating in this space should closely monitor these deliberations to avoid inadvertently crossing regulatory boundaries.

Global Standards: FATF Guidance

At the global level, AML expectations for crypto-friendly banks are shaped by standards issued by the Financial Action Task Force (FATF), which must be implemented through national regulation. FATF guidance requires:

These requirements introduce significant technical challenges, particularly for banks processing transactions on blockchain-based systems.

Because countries adopt FATF recommendations at different speeds, crypto-friendly banks operating internationally must contend with uneven implementation timelines and varying regulatory maturity across jurisdictions.

Common AML gaps reveal weaknesses in control frameworks that frequently induce financial regulators to act against crypto-friendly banks. These gaps often stem from treating a capital-intensive AML target like a regular banking service. Understanding these weaknesses helps institutions identify the controls they must strengthen to avoid punishment, sanctions, or license restrictions.

Inadequate Resource Allocation

Many startups fail to recognise the scale of investment required to build a credible compliance program. This challenge extends well beyond the fees paid to regulators to issue a license.

Institutions must account for several categories of cost, including:

Attempts to treat compliance as a free-standing cost centre rather than a critical operational function inevitably lead to control failures.

Insufficient Expertise

Crypto-friendly institutions often lack sufficiently experienced financial crime risk specialists. Conversely, some institutions rely too heavily on veterans from traditional sectors who are unable to address the unique vulnerabilities of blockchain-based activity.

This imbalance produces control frameworks with obvious gaps—gaps that even an amateur reviewer could identify.

Poor Technology Integration

Banks frequently deploy disparate systems that do not interface across traditional and crypto payment processes. In some cases, this is as simple as partitioning transaction records between payment rails.

When AML approaches fail to reflect the interrelated nature of cryptocurrencies and traditional financial systems, they create blind spots. These blind spots are precisely what regulators will probe during supervisory reviews.

Weak Customer Risk Assessment

Banks may approach customer risk rating as an app-like process, but fail to consider critical variables, such as:

This approach does not allow institutions to properly identify high-frequency traders as a money laundering risk. Banks must manage this exposure through continuous staff training and frequent system upgrades.

Transparency Failures with Regulators

Failing to disclose the full extent of crypto activities—or providing insufficient information during the licensing process—quickly alienates regulators. These failures often result in rejected license applications or license revocations.

As the webinar demonstrated, transparency from the very first interaction with regulators—when institutions present their business model, warts and all—opens the door to faster license approval and builds goodwill with the relevant central bank. This level of trust often takes other institutions years to achieve through far more difficult regulatory journeys.