Managing Risk for the

Next Wave of Digital

Currencies
July 2023
By Bernhard Kronfellner, Steven Alexander Kok, James Mackintosh, and Christian N. Schmid (BCG);
Mike Balestrino (B Capital); and Samir Ghosh (FalconX)
Managing Risk for the Next Wave of
Digital Currencies
The digital-currency marketplace has been in turmoil since the current
“crypto winter” began in mid-2022. Holdings have been breached,
fraudulent and illicit schemes have been revealed, and digital-currency
offerings have lost value, making the risks more evident.

(For an overview of what led to the crypto winter, and of In this article, we aim to describe the risks that come with
where things stand now, see the sidebar “DeFi Summer, supporting and offering digital currencies, as well as appro-
Crypto Winter, and the Future.”) Recent actions by the US priate tools and methods to mitigate them. As long as
Securities and Exchange Commission (SEC) have further clients demand access to digital currencies, from basic
ensured that the risks of digital currency will be top of ones to stablecoins and even central bank digital curren-
mind for investors for some time to come. cies (CBDCs), these risk-mitigation tools should become
part of the operating model of most banks and financial
At the same time, digital currencies are here to stay. Their services organizations.
primary function—to hold and transfer value without a
central authority validating and processing transactions—
will continue to be attractive to investors and other finan- Risks Associated with Digital Currencies
cial services customers. In addition, the rapid pace of
innovation continues. Financial institutions have a duty to While digital currencies are available in a variety of forms
provide the same level of asset-specific offerings, capabili- and flavors (see the sidebar “A Guide to Digital-Currency
ties, and guardrails that they do with other comparable Products and Services”), they can all be assessed against
asset classes. common risk categories relevant to financial institutions.
Exhibit 1 shows these categories arranged roughly in order
This presents financial institutions with a series of strategic of the source of risk—from broad market forces to particu-
challenges. Chief risk officers (CROs) should be asking two lar actors in the digital-currency ecosystem to gaps in the
questions. First, what are the most important new risks financial institution’s own range of capabilities.
associated with digital currencies? Second, how to best
manage those risks? For both these questions, financial
institutions need to pay attention to the factors unique to
digital currencies—requiring new practices, methods, and
ways of thinking.

01 MANAGING RISK FOR THE NEXT WAVE OF DIGITAL CURRENCIES

DeFi Summer, Crypto Winter, and the Future

Many investors acquired digital-currency holdings during The digital-asset economy is now in a period of regrouping.
the steep upswing of “DeFi summer,” which began in Analysis indicates a high level of research and develop-
August 2020. As the COVID-19 pandemic surged, so did the ment, mostly taking place quietly within innovative compa-
value of decentralized finance (DeFi) offerings. (See the nies. As in all bear markets, this is when casual investors
exhibit.) Like many speculative investors before them, and substandard players depart, and digital-asset develop-
some asset managers made digital-currency-related bets ers prepare their next wave of offerings.
without fundamental risk-management practices in place.
Developing a risk strategy for digital currencies, including
DeFi summer ended in November 2021. Later came the those you already own or oversee, does not mean ignoring
collapse of the stablecoin Terra in May 2022, followed in the downturn. It does, however, mean continuing to serve
June by the bankruptcy of the Singapore-based hedge fund customer needs, balancing the value of exposure in digital
Three Arrows Capital. Then came further interest rate currencies against the risks and necessary precautions.
hikes from the Federal Reserve and the FTX bankruptcy.
Each time, the risks became clearer, and more investors
pulled back. By May 2022, the current crypto winter was
fully underway, marked by a steep drop in values. (The
term “crypto winter” makes reference to “Winter is com-
ing,” the motto of one of the warring houses in the TV
series Game of Thrones. The motto refers not only to the
harshness of winters in the house’s continent but also to
the inevitability of difficult times.)

Exhibit - Crypto Market Prices vs. Developer Activity, 2014-2023

800k

Bitcoin (in $) Terra collapse

May 2022
70,000
FTX collapse
65,000 Nov. 2022
60,000
DeFi summer
55,000 Aug. 2020–Nov 2021
50,000 May 2022
45,000
40,000
35,000
30,000
25,000 Three Arrows
Capital bankruptcy
20,000
June 2022
15,000
10,000 Crypto winter
5,000 May 2022–?
0
Jan. 2014 Jan. 2015 Jan. 2016 Jan. 2017 Jan. 2018 Jan. 2019 Jan. 2020 Jan. 2021 Jan. 2022 Jan. 2023

Developer activity Bitcoin (in $)

Sources: Data Statista; CoinMarketCap; BCG analysis.

BOSTON CONSULTING GROUP + B CAPITAL + FALCONX02

The digital-asset economy is
now in a period of regrouping.
A Guide to Digital-Currency Products and Services

Main Products Main Services

Digital Currencies. These virtual currencies—Bitcoin, Centralized Exchanges and Brokerages. These hubs
Ethereum, and many more—are common financial and platforms enable people and institutions to trade
products that all leverage blockchain technology. Many of digital currencies with fiat currencies or with one another.
them have value primarily as speculative investment vehi- Exchanges facilitate price discovery and match orders
cles, which increases their volatility and thus affects their among participants. Brokerages facilitate price discovery
risk profile. and transactions across exchanges. Both exchanges and
brokerages provide additional services related to credit
Some digital-currency offerings (“coins”) have non-specula- and derivatives.
tive value. They are utilitarian, with use cases that include
car rentals and the tracing of goods along a supply chain. Digital-Currency Storage Services. Also known as crypto
Because digital currencies are only minimally regulated, a wallet services, these may be offered by banks or third-par-
high level of risk monitoring and mitigation is considered ty entities to facilitate the management and safekeeping of
best practice for all of them, even those with primarily digital coins, protecting them from being hacked and
utilitarian value. enabling the recovery of lost keys. They also provide quali-
fied storage when required by regulations. Cold wallets,
Digital currencies require a system of verification to vali- which have only an intermittent connection to the internet,
date the integrity of each new coin. They do this by linking are safer from cyberattack than more-connected options.
it credibly to the blockchain. There are two primary ap- Hot wallets, which maintain an internet connection, allow
proaches. In proof-of-work (PoW) verification, each new for more convenient exchanges and transfers of funds.
coin must be generated through mathematical computa-
tion, with each successive coin requiring higher levels of Payment-Processing Services. Retailers and others who
processing power. Proof-of-stake (PoS) digital currencies receive payments in digital currency use these services to
verify the value of each digital coin through affirmation by manage the process. These services are also used for
current currency holders, qualified by the number of coins conversion from one digital currency to another.
they already have “staked” (committed to keep illiquid).
Custody Services. Other services include digital-currency
A typical PoS system is more resistant to cyberattack and management, in which intermediaries act on behalf of the
uses much less energy than its PoW counterparts. Ethere- currency owner, and security services that oversee encryp-
um converted from PoW to PoS in September 2022, be- tion, safeguard private keys, and perform some of the
coming the most prominent digital currency to do so. risk-mitigation functions described in this article.

Stablecoins. These are digital currencies whose value is

pegged to the value of another currency or commodity by
the algorithm. They tend to be backed by other financial
assets as collateral and are thus relatively protected from
some risks. If a chain’s token is collateralized, the digital
currency is likely to be a stablecoin.

Central Bank Digital Currencies (CBDCs). CBDCs are a

form of digital currency being considered by some central
banks or national governments. CBDCs would be released
through a national financial infrastructure that would
manage the digital ledger system and verification.

BOSTON CONSULTING GROUP + B CAPITAL + FALCONX04

Exhibit 1 - Seven Categories of Digital-Currency Risk

1 Market risk Price volatility

2 Counterparty risk Another player’s default

3 Illicit-finance risk Fraud, money laundering, etc.

4 Regulatory risk Continuously evolving local government thinking

5 Security risk Theft, loss, and attack

6 Operational risk Including smart contracts and technological challenges

7 Reputational risk Damage to the public image

Source: BCG/FalconX/B Capital analysis.

1 Market Risk: Price Volatility

2 Counterparty Risk: Default from Other
Participants
The risk of getting caught in a speculative bubble or mar-
ket-driven price cash depends on how speculative the The intrinsic characteristics of digital currencies make
activity is in a digital currency. Stablecoins, which are them akin to a non-transparent illiquid asset. Moreover,
pegged to fiat-currency values and hold underlying collater- while in principle they are decentralized by design, liquidity
al (in the peg currency, or more often in highly liquid assets, is channeled via a rather constrained set of market partici-
such as treasuries), are often marketed as being relatively pants (most notably, digital-currency exchanges) that for all
risk free. But even stablecoins can be volatile, especially intents and purposes have been subject themselves to
when the collateral is inadequate (for example, using yet significant challenges. The challenges for exchanges range
another stablecoin as collateral), insufficient (not fully from ineffective internal controls to issues mostly related
backed), or algorithmic (stabilized by automatic balance to proprietary-trading-style failures (in some cases, driving
against another stablecoin or underlying collateral pool). these exchanges to bankruptcy). If either these exchanges
or some holders of a digital currency cannot meet their
Even stablecoins can be volatile, especially obligations, or appear to be likely to default, the value of
when the collateral is inadequate, insufficient, the digital currency can drop rapidly. As with derivatives
or algorithmic. markets, losses from counterparty risk can spread rapidly
across a digital-currency ecosystem, creating a high level of
Another issue is the relative lack of market controls that volatility that affects other asset classes as well. This poses
traditionally protect participants from extreme volatility a difficult conundrum for financial institutions from a
and from borderline-illegal market swings (such as pump- customer-protection perspective: customers are essentially
and-dump schemes). In the realm of digital currency, holding an asset that is perceived to operate as a currency
market controls are still catching up, and this can become (with market fluctuations akin to those in the foreign-ex-
problematic when a firm is offering clients near real-time change market), but they are exposed to a rather different
exchange for fiat payment purposes. For example, having a risk profile, driven by the intrinsic nature of the digital
wallet that holds bitcoin, and converts to fiat at the point of currency and the operating quality of the ecosystem that
purchase, can lead to challenges in terms of liquidity man- supports it.
agement, internal trading pools, and customer expecta-
tions. These challenges might result in constraining the
offering of some services to a subset of digital currencies,
or taking other mitigation measures (described later).

05 MANAGING RISK FOR THE NEXT WAVE OF DIGITAL CURRENCIES

3 Illicit-Finance Risk: Questionable Actors
5 Security Risk: Vulnerability to Theft, Loss, and
Attack
One common concern about digital currencies is the ex-
tent to which fraud, money laundering, price manipulation, If not properly secured, digital currencies are vulnerable to
and deceptive activity are prevalent. While in absolute theft, loss, and cyberattack. (According to Chainalysis, a
terms, the share of fraud related to crypto globally is not large blockchain-analysis firm, $3.8 billion were stolen from
large, it can still be material: according to the Financial digital-currency businesses in 2022, especially from DeFi
Times, cryptocurrency scams increased by more than 41% protocols. Overall, illicit addresses sent nearly $23.8 billion
in England and Wales (and presumably elsewhere) between worth of cryptocurrency in 2022, a 68% increase over
2021 and 2022. The risk of illicit finance challenges the core 2021.) Intruders can steal or deplete digital-currency hold-
banking services of value custody and fraud protection. ings, and they may also capture private keys (the cryp-
tographic codes used to gain access to holdings). If private
Practices like “rug pulls”—where promoters withdraw keys, passwords, or wallets are stolen or lost, their value
transactions from a digital-currency offering after selling it, may be unrecoverable. Many of the blockchain-intelligence
thereby diluting its value—are like conventional pump- and anti-money-laundering methods described later, in the
and-dump schemes. The digital-currency market, in part risk-mitigation section, have evolved to manage security risk.
because of its cross-jurisdictional nature, does not have the
same level of protections and controls in place that have Illicit addresses sent nearly $23.8 billion worth of
evolved over hundreds of years in the financial services cryptocurrency in 2022, a 68% increase over 2021.
industry. But even if all these controls were in place, digital
currencies are designed to support person-to-person trans- Intrinsically, the custodian model for digital currencies is
actions, without banks or other oversight groups as inter- different from custody for any other asset class. In other
mediaries. This exposes clients to the risk of fraud. asset classes, a bank has a single omnibus structure to
manage the aggregate exposure to the market (this is
4 Regulatory Risk: Continuously Evolving Local
Government Thinking
typically done with retail securities holdings, for example).

With digital currencies, at the most basic level, banks

Governments around the world are developing new rules provide custody to safeguard the key to the holdings. At a
for digital currencies. The SEC, for example, in its June more nuanced level, banks can provide customers with an
2023 lawsuit against Bitcoin and Coinbase, named 19 ongoing view of the digital currency’s exposure to market
cryptocurrencies as securities, thereby setting the stage for risk. Beyond that, banks have limited recourse to support
potential regulatory changes. The uncertainties around this customers, making deposit insurance costs potentially
case will require attention, and add incremental costs in higher. A model similar to other asset classes, recognizing
the servicing of digital currencies. More generally, the the customer’s full level of market exposure, might be
constantly evolving nature of digital-currency regulations preferable. Forthcoming evolutions of digital currencies
means that compliance professionals are paying close essentially aim at a higher level of “self custody” as a
attention to shifts in direction, “skating to where the puck precondition for peer-to-peer transactions. This, in princi-
is headed.” ple, could reduce transaction costs and offer a jurisdic-
tional payment rail at the potential expense of transferring
Banks and other financial institutions have played a rela- custody risk to customers.
tively limited role thus far in helping to shape regulatory
efforts. With digital currencies, where offerings tend to
cross multiple regulatory jurisdictions, they may have a 6 Operational Risk: Complexity, Smart Contracts,
and New Technologies
larger role to play in the future. (See the sidebar “The Call
for Digital-Currency Regulation.”) Digital currencies have more underlying complexity than
other types of value storage and transfer mechanisms.
Typically, they are supported by founding companies (argu-
ably, with the notable exception of bitcoin), with complex
and somewhat opaque governance structures (such as
decentralized autonomous organizations). Also, they often
involve novel technologies and behavioral patterns. As a
result, it’s possible to lose track of all the ramifications of
how the value of the currency should evolve, along with the
consequences of any given trade that supports or under-
pins digital currencies. Some digital-currency investors may
have been caught unaware by this complexity.

BOSTON CONSULTING GROUP + B CAPITAL + FALCONX06

The Call for Digital-Currency Regulation

Even before the SEC actions, many observers were calling

for stronger, clearer regulation and more transparency. Reg-
ulatory agencies around the world are in the process of
finalizing such regulations or at least are developing plans
for them. Also, in October 2022, the Financial Stability
Board, an international organization that makes recom-
mendations about the global financial system, proposed
stricter regulation of crypto assets—in particular, stable-
coins—among the nations with the 20 largest economies
(the G-20 nations). The Global Financial Markets Associa-
tion expressed support for this proposal, stating: “In a
fast-evolving and competitive environment, it is important
for global standard setting bodies to promote the coordina-
tion of an effective and aligned global regulatory framework.”

Even among digital-currency funds, there is a call for stron-

ger, clearer regulation that helps investors and banks
reduce and mitigate risk. Stakeholders ask that the codes
and applications be fair, and that the regulations reflect a
solid understanding of the technology and its value.

Regulators are well placed to convene the conversations

that the industry needs most, with the right people in the
room, ready to listen to one another. Crypto-native institu-
tions should be included in early discussions. They have
the expertise and hands-on experience to recommend a
feasible approach.

Regulators will discover with digital currencies what they

have discovered with many other technologies. For every
major new technological advance, a balance must be struck
between conflicting priorities. In this case, those priorities
include innovation, customer privacy, and the transparency
needed by law enforcement to track illicit activity.

07 MANAGING RISK FOR THE NEXT WAVE OF DIGITAL CURRENCIES

Even among digital-currency funds,
there is a call for stron­ger, clearer
regulation that helps investors
and banks mitigate risk.
Consider forking, which takes place when some partici- How to Mitigate Risks
pants choose not to follow or recognize the original con-
sensus protocol. Instead, they spin out a competing record Banks can mitigate the risks of digital currencies at two
of transactions, as if creating an alternate timeline. Each levels at once: specific to each investment (“bottom up”)
path may have its own transaction record, controlled by its and overall (“top down”), with organization-wide capabili-
own community. In some cases, this is done deliberately— ties. Exhibit 2 shows risk-mitigation strategies that can be
to create new currencies, for example. Nonetheless, the deployed. Typically, these measures are table stakes, and it
paths share a common history and often assets. This is unusual to see a bank or other financial services institu-
produces a risk of losing value or control. tion adopt more comprehensive measures and do so con-
sistently. By putting a comprehensive set of complementa-
Another operational risk is an error in a smart contract, a ry mitigations in place, financial institutions can ensure
core tenet of many digital-currency and other block- that digital currencies are offered and leveraged effectively.
chain-related applications. In simple terms, a smart con-
tract represents the intention to codify automatic execu- Let’s take a closer look at investment-level strategies, and
tion and provide the code some sort of power of attorney. then we’ll examine measures that can be taken at an
For example, a smart contract might specify that an auto- organizational level.
matic sale of digital currencies will take place under pre-es-
tablished conditions (like a complex standing order). In Blockchain Intelligence (BI). Also known as blockchain
general, derivative contracts can be linked directly to digi- analytics, BI is a cornerstone capability intrinsic to digital
tal-currency investments so that options can be executed currencies and blockchain in general. To a large extent,
directly and automatically. A mistake in the drafting and it is the foundation of digital currencies’ enhanced capabil-
coding of that contract could lead to an automatic transac- ities, especially when it comes to granular transparency
tion that was not intentional—and that could lead to and traceability.
substantial accidental losses. Once executed, there is
essentially no recourse. BI is used by CROs, risk executives, law enforcement, and
government regulators to detect and mitigate illicit-finance
7 Reputational Risk: Damage to the Public Image and counterparty risks. Third-party vendors offer increas-
ingly sophisticated AI-based tools and analytic practices for
Big losses and major missteps in digital currency tend to monitoring digital currencies’ blockchain transactions.
be widely reported events. With digital currencies, losses
result from exposure to the ecosystem, and unlike fiat BI is used to detect and mitigate illicit-finance and
currencies, their perceived stability is unrelated to how a counterparty risks.
country or government performs. Reputational damage
may result from the sudden collapse of a vendor or ex- For example, BI systems can use machine learning to
change, the exposure of a mining scam or Ponzi scheme, a detect patterns in transaction histories that are consistent
malware outbreak, the rapid decline of utility tokens, or with money laundering or illicit finance. These systems
backlash against a fraudulent initial coin offering or wallet often connect directly with law enforcement, regulators,
service. Although some threats to a bank’s image may and compliance professionals, giving these authorities
come from public misperception, much reputational risk visibility into real-time financial flows. When there is a
reflects decisions made by employees at every level of problem with a counterparty, investigators can identify the
the hierarchy. related transactions. This gives banks more ability to re-
duce risks to their customers.

Anti-money-laundering (AML) techniques are well-estab-

lished forms of BI oriented toward counterparty and
illicit-finance risks, including the financing of terrorism and
sanctions noncompliance. There are some specific ways in
which key AML controls operate differently in a digital-
currency space:

09 MANAGING RISK FOR THE NEXT WAVE OF DIGITAL CURRENCIES

Exhibit 2 - Strategies for Mitigating Investment Risks
Assessment
of vendor and Proof-of-stake Broader Building
Blockchain Asset Safe storage
partner mitigation institutional
intelligence research participation
relationships strategies capabilities

1. Market risk

2. Counterparty risk

3. Illicit-finance risk

4. Regulatory risk

5. Security risk

6. Operational risk

7. Reputational risk

Source: BCG/FalconX/B Capital analysis.

• Know Your Customer (KYC). KYC evaluates compa- BI also plays a role in the deployment of automated con-
nies and investors when they join the blockchain or trols. These allow banks and other financial services firms
digital currency. It continually compiles knowledge of en- to continually monitor and improve their practices. Auto-
tities’ backgrounds, transactional histories, and expected mated controls, for example, can help limit exposure. In
future activity. some digital-currency investments, rapid liquidity may not
be available. Therefore, banks and investors need to keep
• Know Your Transaction (KYT). KYT, a recently devel- their exposure within the limits of acceptable risk—even if
oped application, evaluates each blockchain transaction all the funds pass muster after asset research (discussed
as it happens. This is essentially the process of transac- next). As discussed previously, digital-currency holders can
tion monitoring, extended to the ecosystem level. An ef- be hurt by the domino effect from another fund’s or ex-
fective KYT system can verify in real time that a transfer change’s failure, even if they don’t hold that fund or do
is not going to a bad actor or a known sanctioned wallet. business on that exchange directly. Thus, as with any risky
investment, an automatic stop-loss and hedging should be
Platforms and dashboards for digital currencies, another considered as options.
important BI offering, bring together information related to
all seven risk categories. For example, a dashboard might Asset Research. Also known as “do your own research”
compare counterparties to see which are highly leveraged (DYOR) processes, asset research involves examining the
and cross-check those findings against these parties’ KYC integrity of the business behind a digital currency to see
and KYT records. These dashboards enable continuous whether investing in it is worth the possible risk, especially
improvement of crypto-related operations. given the potential volatility. There should also be fail-safe
internal audits for all transactions and smart contracts,
before they are finalized.

BOSTON CONSULTING GROUP + B CAPITAL + FALCONX10

Those conducting asset research should closely examine • Hot and Warm Storage Wallets. A third party, such as
the business fundamentals of the digital currency and its an exchange, holds the data. Hot and warm wallets are
sources (for example, founding institutions or even the typically connected to the internet, with warm wallets
exchanges themselves), the financial health of the firm, its downloaded as computer or phone apps.
software and agreement architecture, its balance-sheet
structure, provenance, and business model. One indicator • Cold Storage Wallets. Also called hardware security
of financial health is a robust ancillary revenue stream. modules (HSMs), these physical storage devices are
This might be a blockchain-as-a-service offering with cyber- generally separated from other devices or the internet.
security, insurance brokering, or low-cost digital-currency HSMs are comparable to a brick-and-mortar bank vault:
trading, or a value-creating exchange for airline frequent-fli- access requires physical proximity.
er miles or online-game costumes. Another indicator is the
extent to which exchanges have put mitigation processes • Multi-Signature Protocols. These wallet-based security
in place: upholding sanctions, identifying problematic systems require several private keys for each transaction.
participants, and verifying the identity of counterparties.
• Multi-Party Computation (MPC). MPC, the most
Assessment of Vendor and Partner Relationships. As comprehensive approach, is a wallet-based technique
they become more familiar with digital currency, financial for maintaining secrecy and access. Instead of getting a
institutions may want to reorient their relationships in the private key, each participant holds a unique encrypted
larger ecosystem. Preferred vendors may shift to new MPC protocol.
names, and the relationships with them may need to be
more transparent. There is an expectation that further innovation will allow
clients to be offered the potential benefits of digital curren-
Proof-of-Stake Participation. Financial institutions can cies (including the ability to trade and pay as promised by
gain credibility and income by staking crypto funds, using CBDCs, or as safe storage with stablecoins), without intro-
assets dedicated to that purpose. The income, which ac- ducing self-custody risk.
crues to any proof-of-stake participant, should not be treat-
ed as a return on investment. It consists of transaction fees Broader Mitigation Strategies. As banks gain experi-
and inflationary rewards generated by the blockchain ence with these various forms of mitigation, they will natu-
protocol, and is thus a separate category of income. These rally look at their offerings differently. Broader risk-related
“rewards” are typically partially transferred to clients, conversations can lead to stronger oversight practices
creating the perception of higher savings rates versus throughout the organization. A scenario-planning exercise,
traditional deposit savings offerings. for example, can help banks and investors game out differ-
ent risk scenarios, stay alert to possible challenges, and
Safe Storage. Many banks currently offer a model where respond to risks more successfully when they arise. Scenar-
they maintain full custody over a customer’s cryptocurren- io exercises can also involve third-party experts and regula-
cy transactions, offering a high level of protection and tors, helping teams gain and maintain expertise.
oversight. By contrast, a fully crypto-style model can be as
extreme as transferring custodial responsibilities to the Broader risk-related conversations can lead to
customer. Within this latter model, several basic protection stronger oversight practices throughout
measures can help prevent crypto keys and other critical the organization.
data from being hacked or lost. These include basic
cybersecurity measures, guarding against phishing and A direct consequence of these strategic exercises can be a
intrusion, and protection for digital-currency holdings. set of decisions about offerings. Depending on the custom-
The following is a selection of currently used safe- er base and risk level, some digital currencies might be
storage solutions: removed from an offering or given a longer lead time,
relative to less controlled exchanges, to bring onboard.

11 MANAGING RISK FOR THE NEXT WAVE OF DIGITAL CURRENCIES

Building Institutional Capabilities. Ultimately, mitigat- Conclusion: Moving Forward
ing risk means continuously improving the bank’s func-
tional capabilities, and aligning them with its digital-cur-
rency strategy and risk appetite. Each offering needs to be
considered as part of a larger whole. As new aspects of
D igital currencies, and their various use cases in finance
and other industries, are here to stay. Once banks have
determined the level at which they want to participate in
digital-currency technology appear, and as risk-mitigation this business, it is important for them to support their
techniques evolve, such as protocols, blockchain innova- customers with appropriate risk-management practices.
tions, or software bridges, banks will experiment with This will help banks benefit from new innovations, such as
them. These experiments must be transparent, so that the those in CBDCs.
entire organization can learn from them.
The range of risks and mitigation measures described here
To develop these capabilities, leaders should put in place a may seem complex. However, most banks are already
clearly defined roadmap: laying out the initial digital-cur- familiar with this level of risk intensity. They already have
rency offerings, the staffing and skills needed to deliver most of the tools and capabilities they need. The next step
these offerings, the institutional and technical support is to reorient them to digital currencies, supplement them
required, and the guardrails that help protect customers with specific capabilities related to this asset class, and
from risk. Some capabilities may involve outsourcing, train people accordingly.
especially if they require specialized talent.
Expertise with digital currencies can be a source of com-
Financial institutions can also raise their capabilities by petitive advantage. These financial instruments are still
instituting company-wide guidelines that specify approved new enough that relatively few people are addressing their
practices for digital-currency offerings, by recruiting and customers with the appropriate mix of caution and excite-
developing employees with an eye to improving risk man- ment. Once banks have appropriate measures in place to
agement, by developing appropriate communications and counter risk, and have people on hand who can guide their
compliance policies, and by considering insurance lines for customers, they can confidently explore the opportunities
smart contracts and other digital-currency transactions. and put themselves in a better position for the future.

BOSTON CONSULTING GROUP + B CAPITAL + FALCONX12

About the Authors

Bernhard Kronfellner is a Partner and Director Steven Alexander Kok is Partner & Associate Director,
in BCG’s Vienna office. You may contact him at Technology & Digital Transformation, in BCG’s London
kronfellner.bernhard@bcg.com. office. You may contact him at kok.steven@bcg.com.

James Mackintosh is a Managing Director and Partner Christian N. Schmid is a Managing Director & Partner in
in BCG’s London office. You may contact him at BCG’s Munich office. You may contact him at schmid.
mackintosh.james@bcg.com. christian2@bcg.com.

Mike Balestrino is Vice President, Strategy and Samir Ghosh is Head of Product at FalconX. You may
Operations, at B Capital. You may contact him at contact him at samir@falconx.io.
mbalestrino@bcapgroup.com.

For Further Contact Acknowledgments

If you would like to discuss this report, please contact the The authors wish to thank Sukand Ramachandran at BCG;
authors. Kaj Burchardi at BCG Platinion; Vivek Chauhan, Asad
Kassamali, Ave King, and Kushagra Shrivastava at FalconX;
Thomas Armstrong, Ari Redbord, and Laura Yungmeyer at
TRM Labs; and Lorien Gabel, Annalea Ilg, and Ben Spiegel-
man at Figment for their contributions to this article.

This article was written in collaboration with B Capital and FalconX.

13 MANAGING RISK FOR THE NEXT WAVE OF DIGITAL CURRENCIES

Boston Consulting Group Cosponsors
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