Crypto’s Path to Traditional Finance: Chainalysis Has a Roadmap

Connecting Cryptocurrency and Traditional Finance

As cryptocurrency matures into a full-fledged asset class, 2024 marked a turning point in its adoption by traditional finance (TradFi), thanks to a wave of institutional investments.

Financial juggernauts like BlackRock, Fidelity, and Grayscale debuted exchange-traded products (ETPs) based on Bitcoin and Ethereum, giving retail and institutional investors a streamlined path to digital asset investments. Cryptocurrencies are now being discussed as serious contenders alongside traditional securities.

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The push toward tokenizing real-world assets (RWA), such as bonds and real estate, is reshaping the financial landscape. Siemens’ issuance of its groundbreaking $330 million digital bond demonstrates how legacy companies are embracing blockchain to improve operational efficiency and liquidity.

While some organizations have made strides in integrating cryptocurrencies into their services, the majority are still in the exploratory phase of this transition.

To guide this evolution, Chainalysis has unveiled “The Crypto Maturity Journey,” a step-by-step manual aimed at helping TradFi adopt crypto products.

The Crypto Maturity Journey defines five critical levels of progression:

• Level 0: Establishing foundational knowledge, strategy, and planning.
• Level 1: Setting up business operations to incorporate crypto.
• Level 2: Developing synthetic cryptocurrency offerings.
• Level 3: Enabling cryptocurrency deposit services.
• Level 4: Expanding functionality beyond deposit-based services.

These levels present a clear roadmap for traditional financial institutions to embrace cryptocurrencies step by step. The upcoming sections will delve deeper into each stage.

Chainalysis Cryptocurrency Maturity Path. Source: Chainalysis

Level 0: Building the Foundation Through Education and Strategy

The first step for traditional financial institutions to adopt cryptocurrency is creating a robust foundation rooted in education, strategic planning, and alignment of processes.

Organizations must involve stakeholders from diverse functional areas and appoint a dedicated leader. Ideally, this leader should have experience in cryptocurrency, ensuring seamless coordination and alignment with the company’s strategic goals.

Key Stakeholder Groups

At the foundational stage, participants fall into two distinct categories:

1. Crypto Professionals: These include investment bankers, traders, corporate lenders, and wealth managers tasked with managing crypto-related activities and digital assets.
2. Risk and Compliance Teams: Specialists handling market risks, KYC protocols, AML/CFT measures, financial sanctions, and fraud prevention strategies.

These groups must work in tandem to evaluate the company’s preparedness for cryptocurrency integration, pinpoint areas requiring development, and bridge knowledge gaps. As the initiatives evolve, interdepartmental coordination and leadership involvement will play a pivotal role.

Understanding and Managing Risks

At the outset, companies should begin by assessing their current engagement with the cryptocurrency ecosystem.

Many banks, for instance, have indirect exposure to the crypto market via retail services, treasury operations, or corporate lending. Identifying and analyzing these connections with specialized tools and assessing regulatory compliance risks are vital steps.

Education plays an equally significant role. Blockchain analytics platforms equip teams with critical on-chain data, enabling them to evaluate risks and implement effective risk management strategies.

Mapping the Crypto Knowledge Base

Level 0 begins with education, providing institutional players with a gateway to the cryptocurrency world through these resources:

• Educational Platforms: Courses, blogs, webinars, and research reports give institutions a comprehensive look at crypto’s opportunities and risks.
• Social Media Hubs: X (formerly Twitter) is a dynamic space for crypto conversations, with insights from key voices like Ethereum co-founder Vitalik Buterin.
• Personalized Advice: Consultations with crypto experts help TradFi teams better understand market movements and tools.
• Engaged Communities: Discord and Telegram channels foster active crypto discussions and deliver timely updates on projects.

Just one hour in an active channel can be the equivalent of hours of research into a given crypto niche,

Chainalysis emphasizes.

Institutional players who invest in learning, assemble focused teams, and carefully analyze risks can set the stage for a well-planned entry into the cryptocurrency ecosystem. This critical first step enables a smoother transition to the advanced stages of crypto integration.

Traditional finance must equip itself with the skills to navigate cryptocurrency tools. Source: thecryptoquartet.com

Level 1: Entering the Crypto Business Sphere

Once institutions have evaluated risk thresholds and established robust compliance systems, they can confidently partner with cryptocurrency companies, treating them like any other business collaborators.

Empowering Crypto Clients Through Retail Banking

For retail banks, this involves facilitating connections between clients and cryptocurrency companies that fall within accepted risk thresholds.

BankProv has already taken steps in this direction, providing crypto companies with USD accounts and enabling crypto-to-fiat transactions.

Banks like Ally Bank and Monzo also allow customers to link their accounts to external cryptocurrency exchanges, reducing friction between crypto and TradFi, and making it easier for users to manage their crypto holdings alongside traditional assets,

Chainalysis explains.

Advancing Crypto-Focused Services

At this stage, institutions can expand their offerings to include services beyond basic banking functions.

In 2018, JP Morgan Chase (JPMC) and Goldman Sachs advised Coinbase on going public via direct listing,

Chainalysis notes.

Later, Coinbase enlisted Architect Partners to navigate its acquisition of the derivatives exchange FairX.

These instances underscore the rising complexity of the crypto sector, which increasingly demands M&A advisory, currency exchange solutions, and advanced global settlement systems.

The crypto industry’s expanding needs represent a lucrative frontier for TradFi. Services like cross-border settlements, previously exclusive to traditional clients, can now be adapted for prominent cryptocurrency firms.

Building Crypto-Focused Expertise

To navigate the crypto space, financial companies need to cultivate specific expertise.

This requires intentional recruitment efforts, as buying external firms won’t provide the depth of knowledge needed.

Hiring experienced talent in compliance, security, and related fields allows corporations to form teams that can confidently manage digital asset operations.

TradFi must overcome its hesitation and engage with the crypto industry. Source: cryptopolitan.com

Level 2: Expanding with Synthetic Crypto Products

With a solid foundation in working alongside cryptocurrency companies, banks can begin offering retail and institutional clients a gateway to the cryptocurrency market.

At this stage, there’s no need to manage crypto deposits or custody digital assets. Banks can focus on providing synthetic investment products linked to cryptocurrencies, giving clients the opportunity to benefit from market growth without direct ownership of the assets.

ETP: The Crypto-Market Gates

In 2024, Bitcoin ETPs became a groundbreaking tool for offering crypto exposure,

Chainalysis reports.

BlackRock’s iShares Bitcoin Trust (IBIT) and Fidelity’s Wise Origin Bitcoin ETP (FBTC) swiftly rose to prominence, offering investors a regulated way to gain exposure to Bitcoin’s price trends.

Meanwhile, major players like VanEck and Ark Invest rolled out Ethereum-based ETPs, allowing indirect investments in Ether, the cryptocurrency powering the Ethereum blockchain.

Given that Ethereum and smart contracts play a crucial role in decentralized finance (DeFi), these ETPs offer a straightforward way to invest in the blockchain’s growth,

the guide’s authors emphasize.

Explore more: Ethereum ETFs Hit Historic Inflow—Is Altcoin Season Here?

The Future of Blockchain-Based ETPs

ETPs for other blockchains, such as Solana, could soon become available. Although Solana-dedicated ETPs have not yet been approved, products like the Grayscale Solana Trust (GSOL) already provide investors with access to SOL.

As the Solana blockchain ecosystem grows, the launch of new ETPs tailored to investor interest appears increasingly likely.

Crypto ETFs are innovative instruments revolutionizing the market. Source: watcher.guru

Level 3: Integrating Cryptocurrency Deposits

At Level 3, financial institutions advance by allowing clients to deposit cryptocurrencies into their accounts.

This development provides banks with a pathway to grant direct access to digital asset markets and, in certain cases, manage cryptocurrency custody. While the approach is still in its infancy among traditional players, growing interest from retail and corporate customers is motivating more banks to consider adopting cryptocurrency deposit services.

Streamlining Digital Asset Custody with Partnerships

Navigating the challenges of digital asset custody can be overwhelming, but TradFi institutions can rely on partnerships to ease the process. By collaborating with crypto-specialized firms, banks can outsource critical elements of digital asset management.

BNY Mellon sets a strong precedent. In 2022, the bank launched its custody service for digital assets in partnership with Fireblocks, a digital asset security leader. This approach enabled BNY Mellon to adopt proven infrastructure, bypassing the complexities of building a system from scratch.

To strengthen its risk management and regulatory adherence, BNY Mellon employed Chainalysis tools. These tools provided capabilities like real-time transaction monitoring, risk evaluation of cryptocurrency firms, and the analysis of suspicious operations.

These collaborations allowed BNY Mellon to quickly offer reliable and secure crypto services to its clients, bypassing the need for significant upfront expenditures.

BNY Mellon swiftly introduced dependable crypto solutions to its clients. Source: currency.com

Advancing Institutional Integration

Reaching Level 3 represents a key turning point for traditional FIs, as it merges their capabilities with the requirements of the digital asset ecosystem. By enabling crypto deposits and forging alliances with crypto-native companies, banks can offer secure and convenient tools for engaging with cryptocurrency markets.

These relationships enable FIs to launch crypto solutions faster and with fewer resources invested up front, while also tapping into crypto-native expertise,

the report notes.

Level 4: Pushing the Limits of Cryptocurrency Services

Level 4 involves stepping beyond basic cryptocurrency deposits to provide clients with a broader range of complex and cutting-edge financial products.

This phase creates new avenues for engagement in decentralized finance (DeFi) and blockchain-integrated payment systems.

DeFi: Transforming Financial Services

DeFi is rapidly becoming a cornerstone of the cryptocurrency ecosystem, offering transformative solutions for lending, borrowing, and trading.

Some financial institutions have already embraced this innovation. Fidelity has enhanced its services by allowing institutional clients to leverage Bitcoin as collateral for DeFi-driven loans.

SEBA Bank is equally proactive, forging partnerships with DeFi players like DeFi Technologies and seeking new integration opportunities with decentralized platforms.

Payments: Bringing Blockchain into Banking Workflows

The payments sector offers a compelling opportunity for integrating cutting-edge cryptocurrency technologies.

Visa has solidified its leadership by broadening its stablecoin settlement infrastructure, allowing USDC to be used for transactions by merchant acquirers.

In commercial banking, JPMorgan Chase is leveraging blockchain to innovate payment processes with its JPM Coin, providing a secure and efficient solution for large-scale transactions.

Visa strengthens its position with stablecoin settlements. Source: invezz.com

Level 4: Looking Ahead — Future Opportunities

This stage reflects the maturity of institutions incorporating cryptocurrencies into their traditional financial strategies.

Through DeFi and blockchain-based payment innovations, financial institutions can broaden their service offerings to cater to an increasingly crypto-savvy clientele.

The growing adoption of these solutions by major corporations will dissolve the divide between crypto and traditional finance, accelerating financial sector innovation.

Cryptocurrencies have solidified their place as a trending asset class, with institutional stakeholders recognizing their power to improve client offerings and unlock new revenue channels.

By integrating cryptocurrencies, banks position themselves to explore uncharted opportunities and thrive in the rapidly shifting financial ecosystem.

TradFi evolves by embedding crypto into its strategies. Source: mindmybusinessnyc.com