Banking

blueprint for
the crypto
world
Adoption of cryptoassets
will transform
Adoption banking
of digital currencies
will transform banking

Visit.kpmg.us/blueprint
How banks compete in the digital world has forever changed
due to growing market acceptance of cryptoassets, the rapid
advancement of cryptocurrency technology, and the at-scale
participation of financial institutions in the crypto market.

Case in point: Institutional cryptoasset adoption is driving innovation in

core banking products and services across custody, brokerage, trade
clearing, settlement, payments, lending, and more. At the same time, a
new operational infrastructure for banking is emerging, which has set the
foundation for resilience and growth in a fast-changing industry.

This paper aims to help business and technology leaders in the banking
industry capitalize on opportunities in the growing crypto market by
evolving operations and delivering new crypto services and solutions that
are trusted, transparent, and auditable. We explore three high-potential,
innovative crypto applications and the key technical and operational building
blocks that underlie a successful crypto infrastructure for today’s leading
banking institutions.

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
 2 It is time for banks to engage
with cryptoasset customers

8 Three promising areas of

crypto innovation

12 Banking blueprint for

the crypto world

16
Considerations for
bank infrastructure
transformation

18 How KPMG can help

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 It is time for banks to engage
with cryptoasset customers

Cryptoasset adoption is moving from the fringes of finance to

the largest and most venerable trade centers in the world. Banks
cannot afford to miss the moment.

While the cryptoasset market remains small relative to traditional

asset classes, the time is ripe to tap into the crypto phenomenon. The
institutionalization of crypoassets that KPMG has explored in prior reports has
continued to accelerate, even in today’s turbulent economic environment.1,2
Mainstream adoption of these technologies is largely driven by: (1) increased
regulatory clarity; (2) growing interest among investors; (3) increasing
acceptance of stablecoins and central bank digital currencies (CBDCs);
and (4) a robust ecosystem of commerce centered around cryptoassets
(see Three promising areas of crypto innovation).

Regulatory clarity paves the way for mainstream adoption

With increasing clarity from U.S. regulatory authorities, more and more
large banks are breaking into the crypto space, launching products, services,
solutions and operations designed to engage cryptoasset customers.
Simultaneously, crypto-native companies are reimagining digital banking
services and emulating traditional bank activities through their own prime-
services offerings, while pursuing state and federal banking charters. These
two trends reflect a convergence between two previously distinct market
segments.

The United States Office of the Comptroller of the Currency (OCC) recently
provided greater regulatory certainty for national banks and federal savings
associations, which impacts hundreds of millions of Americans transacting
billions of dollars of digital currencies a day. In July 2020, the OCC issued an
interpretive letter stating that banks in the national system have authority to
provide cryptocurrency custody services to customers. In September 2020,
the OCC announced that banks may hold reserves for customers who issue
stablecoins, i.e., cryptocurrencies backed by a fiat currency, such as the
U.S. dollar.3 Finally, the OCC continued its progress with a January 4, 2021,
interpretive letter clarifying that national banks and federal savings institutions
can participate within independent-node verification networks (INVN) and use
stablecoins to conduct payment activities.4

2 © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
The OCC’s progress paved the way for three crypto-native companies— “Delivering benefits of trust,
Anchorage, BitPay and Paxos5 —to file applications for national bank transparency and auditability,
charters under the OCC’s regulatory structure, with Anchorage cryptoasset adoption continues
becoming the first approved national crypto bank on January 13, 2021.6 to rise among both retail and
The momentum of these applications in late 2020 and early 2021 is likely institutional investors. As crypto
a leading indicator that crypto companies will continue to offer a broader goes mainstream, it is paving
array of products and services to their national customer bases. the way for massive innovation
in the banking sector, including
On the state level, Wyoming made history in the fall of 2020 by granting new products and services
its first state Special Purpose Depository Institution (SPDI) charters to with significant future growth
digital asset companies Kraken Financial and Avanti Bank & Trust.7,8 potential.”
 Sam Wyner
Director, One Americas
Blockchain & Cryptoassets
The crypto advantage KPMG

Although cryptoassets have garnered a mixed reception by the

press and are based on admittedly complex economics, proponents
say the currencies have the potential to solve some of the stickiest
problems in the broad financial ecosystem and create new levels of
openness, trust, and scale.

– Accessibility: Cryptoassets help create a more open financial

system, providing an alternative to traditional asset classes and
democratizing financial access to a wider range of customers on
a peer-to-peer network of exchange.

– Efficiency: Cryptoassets remove intermediaries, fees and other

roadblocks to large transactions, creating a faster and less
expensive global payment network. Open data on the blockchain
allows infrastructure to automate and markets to stay open,
always.

– Transparency: As native digital assets, cryptoassets provide

increased transparency throughout the asset lifecycle. Public
blockchain ledgers make it possible to independently verify and
audit accounts and transactions, bringing real-time understanding
and greater assurance to custody and settlements.

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 It is time for banks to engage with
cryptoasset customers (continued)

Growing investor and institutional interest

More institutional investors are taking an interest in crypto, Financial firms have also increased their involvement.
including well-known investment management leaders Some of the biggest U.S. banks are said to be exploring
in the space. For example, BlackRock CEO Larry Fink the custody side of the crypto market, including Goldman
recently took a relatively bullish view of bitcoin, saying it Sachs and J.P. Morgan.12 At the same time, large payment
could potentially evolve into a global asset.9 His statement providers such as PayPal are beginning to allow customers
followed earlier announcements by billionaire investors to buy, hold, and spend certain digital currencies on their
Paul Tudor Jones, Bill Miller, and Stanley Druckenmiller networks.13,14
that they held and recommended bitcoin.10,11 These recent
positions can be viewed as an institutional milestone for Charting bitcoin price movements over time is further
cryptoassets, serving to validate certain aspects of bitcoin evidence that more institutions—particularly in the
to the traditional investment community. In addition, U.S.—are adopting cryptoassets. Price movements since
activity in the institutional sphere ramped up significantly November 2020 have strongly correlated to U.S. market
in the second half of 2020, when a growing number of hours, compared to 2017 when the market was far more
publicly traded companies converted their fiat reserves retail driven.
into bitcoin.

BTC Price vs. Institutional Interest

Bitcoin’s rising price has been influenced and supported by many institutional investors and
companies entering the space.
Source: Coin Metrics, February 2021

4 Banking blueprint for the crypto world © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
Measured by usage, adoption and value, bitcoin’s surge
over time is impossible to ignore. According to Coin “As cryptoassets become more liquid, trusted and
Metrics data as of January 2021, active bitcoin addresses accessible, ownership and trading is growing at
(wallets with activity in the past 30 days) numbered nearly a steady clip. Current usage of bitcoin and other
1 million per day, the highest in history and nearly doubling cryptocurrencies by investors, companies and even
since a short-lived valley in 2018.15 Notably, addresses central banks shows rapid, widespread adoption at
holding greater numbers of bitcoin (2,000+ equating to both the retail and institutional level. Taken together,
roughly $2M in dollar value) are still a minority, but started the amount and value of digital assets under
rising through 2020 and into 2021—a further sign of management are growing exponentially, signaling
increased institutional investments and holdings. the rise of a tokenized economy with tremendous
purchasing power.”
Cryptoasset market economic activity also shows signs  Nate Maddrey
of growth. The adjusted transferred value of bitcoin—a Senior Research Analyst, Coin Metrics
measure of how much bitcoin is being transferred for
payments, investments and other selling activities—is
currently experiencing a spike. At the present time,
approximately $8B of bitcoin is transferred daily on the
blockchain, more than three times the activity seen at
the beginning of 2020.

BTC Market Cap and Realized Cap

BTC Realized Cap BTC Market Cap

Bitcoin’s popularity in late 2020 brought an increase in total value reflected in both the market cap
and realized cap, a realistic measure of the total market size.
Source: Coin Metrics, February 2021

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 It is time for banks to engage with
cryptoasset customers (continued)

Similarly, the bitcoin market cycle is nearing a high. Bitcoin

market capitalization—the most commonly used metric “Stablecoins draw retail and institutional investors
to measure the total value of the cryptoasset—recently who like the benefits of cryptoassets—for example,
surpassed $800B, a new record. The realized market that you can send them instantly and custody them
capitalization, a metric developed by Coin Metrics to yourself—but don't like their volatility.”
realistically determine Bitcoin’s market size, has also seen
 Nate Maddrey
its largest increase since 2018. Senior Research Analyst, Coin Metrics

Bitcoin market sizing trends also indicate institutional-

level investment growth. When compared to traditional
asset classes, like equities and bonds, bitcoin spot market Increasing acceptance of stablecoins and
volume is small. However, its growth rate over time is central bank digital currencies (CBDCs)
exponential, signaling that, although many institutions
are not buying bitcoin directly, they are increasingly Interest in and use of stablecoins and central bank
participating in the bitcoin markets by trading futures and digital currencies (CBDCs)—often seen as gateways to
other financial instruments. cryptoasset markets for traditional financial institutions—are
growing exponentially, another sign of the major opportunity
ahead for banks.

Total Stablecoin Supply

2020 was a year of increased stablecoin supply across all available stablecoins, reaching a record high of $40B.

Source: Coin Metrics, February 2021

6 Banking blueprint for the crypto world © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
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Stablecoins are digital assets with value pegged to a stable geostrategic and political factors. At the start of 2020, only
traditional asset, most often a currency such as the U.S. 20-30 governments around the world were serious about
dollar. They are backed by collateral (assets and funds) that developing a CBDC. Today, more than 70 countries across
is held in traditional banks. Since their inception, stablecoins both emerging and established economies are engaged
have been used extensively to limit traders’ exposure to in CBDC research projects or pilot programs, hoping the
crypto price volatility, which had previously been a major currencies can help increase their economic influence and
point of friction in the market. expand financial inclusion.16

Stablecoin adoption has gone parabolic since March 2020. As more countries consider launching CBDCs, the stage is
With more than $40B in stablecoins issued, adjusted being set for banks to enter the cryptoasset markets. The
transfer value has skyrocketed for different stablecoins banking industry is already moving to support cryptoasset
as more and more customers use them for payments, customers in the payment and lending spheres, but the
remittances, and trading. transformation is gaining momentum. National adoption—
particularly by the U.S. Federal Reserve and European
Central bank digital currencies (CBDCs) provide a Central Bank—may provide the tipping point into broader
digital, often tokenized version of a country’s or region’s acceptance. If banks can ready their infrastructures for
fiat currency. CBDCs are officially created, issued, and their arrival, CBDCs could, ultimately, rise to an array
regulated by central banks and federal regulators. of revenue-driving, blockchain-based bank technology
solutions for custody, remittances, wire transfers, and
Since 2017, multiple countries have explored CBDC more.
proposals, and a few are piloting the technology. Now,
interest is increasing at lightning speed, driven by both

“Government adoption of digital assets is the signal many banks are

waiting for to move full throttle forward with developing or expanding
cryptoasset operations. Given widespread interest and activity at the
national level, we think it will happen soon. Central bank digital currency
(CBDC) projects are progressing all around the world, and when one
country moves, we expect others to fast follow. To strengthen their
competitive position in this emerging economic landscape, banks
should be detailing strategies and plans to address and capitalize on the
customer, business, technology, and operational impacts of CBDCs.”
 Josh Lipsky
Director, Policy and Programs
GeoEconomics Center at The Atlantic Council

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 Three promising areas
of crypto innovation

Crypto products and services have demonstrated tremendous

growth potential in the banking sector. There are multiple areas of
opportunity for traditional banks, fintechs, and digital native banks
to deliver solutions for storing, moving, and using cryptoassets
easily and securely.

Banks that successfully service cryptoasset businesses and investors will likely
have competitive advantages in the future. Three banking segments—prime
brokerage; yield generation via lending, borrowing and staking; and
payments—stand out for their profit potential.

Prime brokerage services

Custody—the management of assets and the underlying cryptographic keys
that cryptoasset owners use to execute transactions—is a critical capability of
the crypto economy. It allows banks to engage with the crypto ecosystem and
add adjacent operations and services, including cash management, securities
lending, leveraged trade execution, and other white-glove support.

Addressing issues of custody is a logical first move for banks that want to
engage with crypto customers. Growing numbers of institutional clients—just
like all crypto-market participants—are seeking ways to safely provide custody
and use cryptoassets. Traditional banks are in a strong position to meet their

Emergence of crypto prime-services providers

Digital asset financial services firm BitGo launched

BitGo Prime, an integrated trading, lending, and custody
platform for cryptoassets.17

Cryptocurrency exchange Coinbase bought crypto

prime brokerage Tagomi, an institutional trading
platform for cryptoassets.18

Digital currency trader and lender Genesis Global

Trading expanded its services offerings by acquiring
crypto custodian Vo1t.19

8 © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
needs: They already have deep experience safeguarding a wide variety of other “There is a race underway to
assets, such as currencies like dollars and yen, investments like stocks and provide a prime broker-like
shares, esoteric derivative products like options and non-deliverable forwards, service in the crypto space.
and even physical wealth like gold and art. Banks may have an edge. In
fact, prime services is likely to
The back-office infrastructure and processes to custody digital assets diverge be many banks’ first entry into
from typical bank custody models and pose new risks that must be assessed the crypto ecosystem. Although
and managed. cryptoasset ownership is still
dominated by retail investors,
Current crypto custody models take a variety of forms. Recently licensed institutional clients such as
Wyoming SPDIs such as Avanti Financial and Kraken are chartered banks that high-net-worth individuals are
fully managed custody services to institutions that own and trade cryptoassets. participating in greater numbers.
Crypto exchanges, such as Coinbase, Kraken, Gemini, and Binance offer digital They are looking to banks they
wallets to enable retail investors to hold, protect, and trade cryptoassets. Third- are already in a relationship with
party custody providers such as BitGo and self-custody models such as Ledger to store and safeguard their
and Casa are technology solutions that store and protect cryptoassets. cryptoassets and also bundle in
white glove services to facilitate
The business opportunities for crypto custodians are enormous and evolving. But trading and other investor
that is only the tip of the iceberg. Custody is the basis of a prime services stack activities at scale.”
that includes everything from borrowing to lending to execution.
 Mike Belshe
Chief Executive Officer
What sets prime brokers apart—in crypto and traditional financial markets—is BitGo
how they enable investors to manage their businesses through integrated
offerings for trade clearing, settlement, order routing, exchange, lending,
leverage, fund administration, portfolio management, financial reporting, tax
reporting, and more. The race to prime brokerage accelerated in 2020 through
significant acquisitions and the launch of adjacent products and services by
existing players. Institutional customers entering the market are now benefiting
from a wider array of trading options and a more secure and flexible post-trade
settlement processes.

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 Three promising areas
of cryptoinnovation (continued)

For example, BitGo—a digital asset financial services firm that offers custody and
other prime services for crypto investors—illustrates how banks might develop a
prime services model for crypto customers. BitGo developed a system to enable
cryptoasset owners to sell assets and settle trades internally, without moving
assets from their custody wallets. This is representative of a risk-mitigation
approach that enables cryptoasset owners to participate in the market without
exposing assets to on-chain settlement risks.

Yield generation: Crypto borrowing, lending, and staking

The growth in crypto prime brokerage demonstrates strong institutional
interest. However, the demand cycle for crypto borrowing and lending has risen
dramatically across the full spectrum of crypto-market participants. This demand
cycle is reflected in the dramatic growth of user adoption of centralized lending
platform organizations like BlockFi20 and Celsius,21 as well as the explosion of
decentralized finance (DeFi) through early 2021, with the total value of assets
“locked” in DeFi exceeding $25B.22

In both centralized and decentralized crypto-borrowing and lending models,

crypto users can deposit their cryptoassets to generate yield. Yield generation
has proven to be a critical value-added service layer for participants who have
taken investment positions with long horizons. Centralized organizations that are
developing borrowing and lending solutions are poised for significant growth as
institutional adoption continues and greater numbers of retail investors pursue
yield-generation opportunities.

The rise of DeFi has been driven by technology advancements enabling more
effective decentralized governance. The most notable DeFi applications to date
focus on decentralized peer-to-peer exchanges and lending of crypto assets. In
this context, first movers including Uniswap, MakerDAO and Compound have
exploded in growth and user adoption throughout 2020. While the regulatory
dynamics around DeFi remain uncertain, the transformative potential of this new
segment is just starting to be realized.

10 Banking blueprint for the crypto world © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
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In parallel to yield generation from borrowing and lending, the rise of Proof-
of-Stake (PoS) networks has created new opportunities for yield generation
through “staking.” Staking is a process by which users on PoS networks
“stake” their assets to participate in consensus, ultimately generating yield Staking is a process
through block rewards issued by a given blockchain. PoS yield generation is by which users on PoS
another value-added service exchanges and custodians are offering to their networks “stake” their assets
clients. Similar to DeFi, there are a number of key questions around staking to participate in consensus,
related to regulation and taxes that still need to be answered to provide clarity ultimately generating yield
for adoption by regulated financial services businesses. through block rewards
issued by a given
Payments blockchain.
Around the world, digital payments are exploding in the business-to-business
and business-to-consumer arena. Across these models there has been an acute
focus on cross-border payments to realize efficiencies in cost and settlement
provided by stablecoins. Mobile payment apps like Square’s Cash App and
PayPal’s Venmo have exploded in popularity, especially since COVID-19 social
distancing has restricted the use of physical cash to some extent.

The increasing integration of cryptoassets into established fintech payment

platforms has introduced new on-ramps to crypto adoption and new payment
rails using crypto for on-chain transactions. Using public blockchains for cross-
border payments and settlement, especially with stablecoins, is a new low-
friction mechanism for transferring value outside of traditional payment systems.

Banks and payment providers are moving quickly to participate in the growing
digital payments arena. In November 2020, PayPal launched services to enable
customers to buy, sell and hold cryptoassets including bitcoin, bitcoin cash,
litecoin and Ethereum.23 PayPal’s move was followed by another large payment
provider that added a stablecoin infrastructure company to its network.

Wider implementation in banking is the next step, and it appears it will soon
be underway. Amex, Mastercard, PayPal, and Bank of America are among the
financial firms that have filed hundreds of patents involving the use of blockchain
technology for speedy payment rails, internal payments, and other forms of
payments.24

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent Banking blueprint for the crypto world 11
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 Banking blueprint for
the crypto world

To meet the needs of cryptoasset owners, especially at the

institutional level, bank operations need to evolve.

We have identified the seven key pieces that should constitute a bank’s
operational infrastructure in order to deliver innovative and competitive crypto-
based services. We believe evolving capabilities and business models in the
key areas where crypto activities touch current operations will help banks seize
the most promising digital-services business opportunities in the expanding
crypto market.

1. Seamless customer experience

Successful firms will feature retail and commercial interfaces that allow for
seamless engagement between crypto products and services and traditional
assets. The environment is likely to be similar to web and mobile apps banking
customers use today. In an all-in-one digital setting, crypto customers will
be able to access funds easily and quickly, perform transfers of assets for
paying bills and purchasing goods, and utilize assets for lending and borrowing
activities.

The focus on customer experience has been a core driver behind the growth
in institutional prime services. Institutional asset managers with little to no
experience in the crypto space are able to call upon their historical focus on
customer experience and white-glove treatment used in the traditional-assets
arena.

2. Modernized custody models

Custody is a critical capability to ensure customers’ cryptoassets are protected
from theft or loss and are available for use.

The custody and control of cryptoassets is significantly different from traditional

financial assets due to the finality of transactions settled on public blockchains.
This difference presents unique risks related to how organizations manage
processes and technologies to securely manage cryptographic key material
that control customers’ assets.

Given this unique control model, traditional bank custody frameworks,

processes and technologies must evolve for the crypto ecosystem. Back-office
systems for storing, safeguarding, and accounting for digital assets are built on
a new kind of technical foundation, specifically designed for cryptoassets native
to public blockchains. In this context, banks must make critical “build or buy”
decisions to unlock cryptoasset products and services.

12 © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
3. Reporting and auditing capabilities “Whether they build it from
Trust is necessary to attract and retain crypto-based banking customers, scratch or acquire a crypto-native
especially institutional ones. To compete in this growing market, banks will need custody product, implementing
to show that their cryptoasset services are transparent, have integrity, and are a new custody infrastructure
aligned with best practices. fit for digital assets is one of
the biggest investments banks
Trust in the financial services industry is traditionally managed through extensive will make to get started in the
information reporting and disclosure requirements on assets, customers, crypto space. It is also one of
transactions and more, which are often reviewed, tested and audited by the most critical. Other products
regulators and public accounting firms. and services banks sell to
crypto investors—solutions for
Standard setters are working to apply existing third-party attestation, assurance, trading, clearing, settlement,
and certification approaches such as SOC exams/reports and federal and more—will be built on top
information security guidelines to crypto business models. Compliance with of it. They have to get it right to
such frameworks can help banks offering cryptoasset products and services earn customer trust and recoup
ensure they have the correct controls for identifying, managing, monitoring, and their investment through prime
mitigating risks. service offerings.”

It is also important to note that audit procedures for banks serving crypto  Mike Belshe
customers will require unique approaches to validating ownership, control, and Chief Executive Officer
existence of assets. As the audit and accounting landscape evolves to consider BitGo
unique crypto risks, modern automated testing approaches will take advantage
of the transparency and auditability offered by public blockchains.

4. Integrating public blockchain data with internal data

Public blockchains house a detailed history of every single transaction that has
ever been confirmed on the network. This data is encrypted and compressed as
the blockchain extends, creating challenges when it comes to normalizing and
using blockchain transaction data.

Organizations must overcome the challenge of building unified views of their

customers’ and clients’ on-chain and off-chain transactions in order to achieve
business, compliance, and risk-management objectives. Compounding these
challenges, data elements from public blockchains are fundamentally different
from the data used and generated by traditional systems.

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 Banking blueprint for
the crypto world (continued)

5. Next-level cyber security

The stakes for cyber security are higher in the crypto arena primarily because of
the finality of transactions on public blockchains. Cryptoassets that erroneously
change hands on public blockchains cannot be recovered by the original asset
owner, since there are no central authorities responsible for confirming, clearing,
settling and accounting for the transaction.

Broadly used and accepted cyber security control frameworks in the

financial services industry include NIST 800-53, which is a common baseline,
complemented by more discrete standards such as the U.S. Federal Information
Process Standard (FIPS) 140-2, a federal security certification for cryptographic
key management.

Banks competing in this space must deliver enhanced security to manage unique
crypto risks. Next-generation security is required to monitor and defend against
the cyber- and information-security risks of cryptoasset businesses.

6. Industry-standard risk management and controls

Cryptoassets present fundamentally new risks that must be analyzed,
understood, and managed. While there are unique risks, blockchain infrastructure
also presents new opportunities to deploy automation across risk management
and controls that were not previously possible with traditional technology
infrastructures.

When entering the crypto space, banks must partner across the three lines
of defense to build risk management practices and control environments
to integrate existing industry frameworks and regulatory requirements. In
addition, banks must also identify and rationalize the key differences and gaps
in these frameworks that exist due to the nature of cryptoassets. For example,
cryptographic key management controls as defined in industry standards such
as NIST 800-57 do not consider the use of cryptographic keys to directly manage
and secure flows of funds.

Control environment optimization and rationalization can help firms meet the
quickly evolving expectations of global regulators and institutions entering
the space. This is becoming increasingly important as organizations such as
Coinbase and Bakkt pursue public stock offerings.25

14 Banking blueprint for the crypto world © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
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However, standards continue to emerge, evolve, and mature as adoption of “Security is what gives
crypto expands. Banks should track emerging developments in cryptoasset risk institutional investors the
management and controls with a focus on technical and operational agility to comfort level to engage with the
address new frameworks and industry expectations. crypto markets. It is of utmost
importance. Banks will need
7. Robust regulatory compliance best-in-class hot and cold storage
Banks launching crypto products and services must comply with specific for cryptoasset wallets to protect
regulatory requirements, which will help them develop robust risk-based investors and win customers.”
compliance programs that go beyond compliance for traditional assets.  Mike Belshe
Chief Executive Officer
Significant crypto-relevant regulations are carryovers from the traditional financial BitGo
industry, including Anti-Money Laundering (AML), Know Your Customer (KYC)
Bank Secrecy Act (BSA), and the FATF Travel Rule, which requires firms to share
customer information when they transfer funds between firms. One of the
key focus areas of bank compliance activities will be financial crimes, a major
problem in traditional financial markets. The risk of financial crimes has been
heightened by the digital, less-regulated nature of the crypto markets, which
unfortunately garnered an early reputation for facilitating illicit, black-market
activities.

Although existing banks will typically have mature AML, KYC and BSA
compliance programs in place, they will need to enhance their technology
and processes to meet the novel challenges of cryptoassets. For example,
transaction monitoring will require a combination of traditional techniques
and inputs from blockchain analytics providers alongside cryptoasset-specific
considerations.

There is no consistent global regulatory framework for cryptoassets, and

there are variation and duplication in the nature and application of rules across
jurisdictions. This complexity creates significant compliance challenges for banks
and necessitates close monitoring of regulatory changes around the world.

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent Banking blueprint for the crypto world 15
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 Considerations for bank
infrastructure transformation

If crypto markets continue to evolve at the pace and scale currently

underway, today’s traditional banking infrastructure may have a limited
shelf life. Growing participation in the crypto economy is making new
crypto capabilities essential foundations for the bank of the future.

How can banks get started engineering a business transformation of such magnitude
and position themselves for success in the emerging digital economy?

Here we outline key actions to help banks accelerate their strategic roadmaps and
develop core business and technology capabilities to serve crypto market customers.

Determine where to play.

Aligning products and services with market acquisition and customer churn. It is also critical to
opportunities is a key early step of all business take an inventory of the bank’s existing product and
transformation efforts. A bank should start by service set. It is well known that custody capabilities
tracking growth trends to understand current and will be central to a bank’s overall cryptoasset
future customer demands for cryptoasset offerings. strategy, but choosing other revenue streams
Then they should assess how the needs of target to pursue will depend on each bank’s individual
customers align with the bank’s broader customer strengths in prime brokerage, lending, payments,
focus, considering the impact of planned products and other adjacent services.
and services on revenue per customer, customer

Build or buy technology (or both).

Cryptoasset products are underpinned by a be more wary of homebuilt solutions, so banks
complex and novel infrastructure, with blockchain located in certain locations may need to go above
at its core. Whether to build blockchain systems and beyond to demonstrate they have a defensible
internally or acquire technology from crypto-native infrastructure that makes regulators comfortable.
companies will depend on a variety of factors. Finally, building or buying is a competitive choice:
Talent is the most important one: Does the bank A bank can often get to market faster if it acquires
have in-house talent capable of developing and existing technology capabilities vs. creating new
implementing cryptoasset products, or is their ones from scratch, so understanding the level
skillset limited to simply running the technology? of customer demand in the market and how
Where the bank operates geographically will also competitors are positioning themselves to meet it
matter: Regulators in certain jurisdictions tend to will be crucial.

16 © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
 Track and adjust to the regulatory climate.
Existing regulatory structures for the cryptoasset participants are expected in the near future? What
ecosystem are highly complex and everchanging. trends can be gleaned from announcements
A bank launching cryptoasset offerings will and updates from leading financial authorities,
need to keep a finger on the pulse of regulatory treasuries, and central banks? The bank’s regulatory
trends, both in the jurisdictions where it currently compliance strategy should be dynamic—able to
operates and those it may wish to access in the address a variety of scenarios that may play out in
future. Look across G20 countries and emerging the next year, three years and five years, all around
economies to understand the approaches of the globe.
different governments. What rules must the bank
play by now? What guidelines for crypto market

Stress scalability.
We have demonstrated throughout this report disruption before. The most innovative will apply
that the cryptoasset industry is moving incredibly lessons learned during the past 30 years to prepare
quickly in terms of market growth and diversity of for this next wave, ensuring their infrastructure can
product offerings. If the current pace continues, support all types of digital assets—even those that
massive change is coming to the banking sector, do not yet exist.
and skyrocketing value will be there for the taking.
Banks have lived through technology-driven

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent Banking blueprint for the crypto world 17
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
 How KPMG can help

Bridging traditional and blockchain systems

The KPMG Cryptoasset Services practice helps banks, fintechs, and other
financial services institutions develop and optimize core capabilities to
engage with the growing ecosystem of crypto customers. We leverage
our KPMG Chain Fusion suite of accelerators to help our clients deliver
institutional quality cryptoasset capabilities and services.

The nature of blockchain technology powering cryptoassets is

fundamentally different from the traditional information systems that
underpin existing financial market infrastructure. To successfully operate a
cryptoasset business, institutions must effectively integrate blockchain data
alongside traditional data to support core business functions. Leveraging
leading technology and frameworks, our services are designed to help
clients accelerate trusted adoption of core cryptoasset capabilities through a
consistent data architecture that supports seamless business engagement
across blockchain protocols.

The KPMG Cryptoasset Services practice brings a broad range of specialized

business and technical skills to the table. Our team includes a variety
of ecosystem participants including crypto specialists, cyber security
professionals, technology architects, data scientists, capital markets
specialists, regulatory compliance and financial crimes professionals,
technology auditors, tax professionals, and accounting advisors.

Learn more at read.kpmg.us/chainfusion.

“Secu
inves
Related reading with
impo
hot a
walle
custo
Nick C
Chief
Head

Institutionalization of cryptoassets Cracking crypto custody

Cryptoassets have arrived. Breaking down the building blocks
Are you ready for institutionalization? of institutional cryptoasset custody.

18 © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
 References

1 Cracking Crypto Custody (KPMG LLP, 2019) 14 PayPal Surprise Announcement Pushes Bitcoin Towards $13k
(Forbes, Oct. 21, 2020)
2 Institutionalization of Cryptoassets (KPMG LLP, 2018)
15 BitGo Prime, Combined with BitGo Trust, Only Platform
3 Federally Chartered Banks and Thrifts May Engage in Certain
to Fully Integrate Lending, Trading and Custody (BitGo
Stablecoin Activities (Office of the Comptroller of the Currency,
Newsroom, May 27, 2020)
Sept. 21, 2020)
16 C
 oinbase Buys Tagomi as ‘Foundation’ of Institutional Trading
4 Federally Chartered Banks and Thrifts May Participate in
Arm (Coindesk, May 27, 2020)
Independent Node Verification Networks and Use Stablecoins
for Payment Activities (Office of the Comptroller of the 17 G
 enesis Trading Buys Crypto Custodian Vo1t (Coindesk.com,
Currency, January 4, 2021) May 21, 2020)

5 Crypto Firms Paxos, BitPay Apply for National Bank Charters 18 Coin Metrics, December 2020
(Banking Dive, Dec. 14, 2020)
19 T
 he Rise of Central Bank Digital Currencies (Atlantic Council,
6 Anchorage Granted US's First National Crypto Bank Charter Sept. 8, 2020)
(CoinTelegraph, Jan. 13, 2021)
20 B
 lockFi Raises $50M Series C Led by Morgan Creek Digital
7 Kraken Wins Bank Charter Approval (blog.kracken.com, (BlockFi, Aug. 20, 2020)
Sept. 16, 2020)
21 Celsius Crosses $5.3B in Assets, Grows Total Assets 10X
8 Avanti Financial Joins Kraken as a Wyoming-Approved Crypto during 2020 (Yahoo Finance, Jan. 20, 2021)
Bank (Coindesk.com, Oct. 28, 2020)
22 D
 efi Pulse (Jan. 2021)
9 BlackRock’s Fink Says Bitcoin Can Possibly ‘Evolve’ Into Global
23 PayPal Launches New Service Enabling Users to Buy, Hold
Asset (Coindesk, Dec. 1, 2020)
and Sell Cryptocurrency (PayPal Newsroom, Oct. 21, 2020)
10 Paul Tudor Jones Calls Bitcoin a ‘Great Speculation,’ Says He
24 B
 ank of America Tech Chief is Skeptical on Blockchain Even
Has Almost 2% of His Assets In It (CNBC.com, May 11, 2020)
Though BofA Has the Most Patents For It (CNBC.com,
11 W
 all Street Legend Bill Miller Reveals ‘Strong’ Bitcoin March 26, 2019)
Recommendation Despite Massive Price Surge (Forbes, Nov.
25 C
 rypto Exchange Bakkt to Go Public Via a $2.1 Billion Deal
9, 2020)
urity is what gives institutional with Blank-Check Firm (CNBC.com, Jan. 11, 2021)
stors the12comfort
Goldman Sachs
level to
toEnter
engageCrypto Market ‘Soon’ With Custody
Play: Source (Coindesk,
the crypto markets. It is of utmost Jan. 15, 2021)

ortance. 13
Banks
PayPalwill needNew
Launches best-in-class
Service Enabling Users to Buy, Hold
and Sell Cryptocurrency
and cold storage for cryptoasset (PayPal Newsroom, Oct. 21, 2020)
ets to protect investors and win
omers.”
Carmi
Executive Officer, BitGo Prime
of Financial Services, BitGo Inc.

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent Banking blueprint for the crypto world 19
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
 About the authors

Arun Ghosh is the One Sal Ternullo is a director in Sam Wyner is a director in Sydney Rice is an associate
Americas Blockchain the KPMG One Americas the KPMG One Americas in Cryptoasset Services
& Cryptoassets Leader Blockchain & Cryptoassets Blockchain & Cryptoassets within the KPMG One
at KPMG. An industry- practice and co-leader of practice and co-leader of Americas Blockchain &
recognized management KPMG Cryptoasset Services. KPMG Cryptoasset Services. Cryptoassets practice.
consultant, he has more Drawing on his deep Sam helps traditional She helps financial
than 20 years of experience technical background in financial services, fintechs services clients manage
helping organizations in a cryptocurrencies, blockchain, and crypto-native companies technical implementations
wide range of industries robotic process automation, develop strategies and of blockchain and
unlock value through and public cloud computing, manage risks driven by the cryptocurrency. Sydney
technology-driven business Sal helps companies across implementation of emerging has deep experience
transformation. Arun industry lines develop, technologies, including in cryptography, token
possesses deep expertise design, implement, and cryptoassets and blockchain. economic systems, risk
in corporate strategy, data manage products and He has hands-on experience management, compliance,
analytics, and emerging services for the crypto designing and building the security, and product
technologies such as economy. technologies and processes management.
blockchain, automation and that power cryptoasset
artificial intelligence. businesses.

KPMG Cryptoasset Services professionals Derek Becker, Kevin Bornatsch, Shay Cannon,
Okiki Famutimi, Marty O’Grady, and Bianca Nargi were also instrumental in developing the
insights and content for this report.

20 Banking blueprint for the crypto world © 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
 Acknowledgments

Coin Metrics is the leading provider of crypto financial intelligence, providing network
data, market data, index and network risk solutions to the most prestigious institutions
touching cryptoassets. Coin Metrics was founded in 2017 as an open-source project to
determine the economic significance of public blockchains. Today, we expand on that
original purpose to empower people and institutions to make informed crypto financial
decisions. We aim to usher the world’s premier financial institutions into crypto with the
most trusted data and insights.

The Atlantic Council’s GeoEconomics Center works at the nexus of economics, finance,
and foreign policy with the goal of helping shape a better global economic future. The
Center is organized around three pillars—Future of Capitalism, Future of Money, and the
Economic Statecraft Initiative.

BitGo is a leading provider of capital markets infrastructure for cryptocurrencies. BitGo is

the only digital asset company that has been focused exclusively on serving institutional
clients since 2013. BitGo secures approximately 20% of all on-chain Bitcoin transactions
by value and supports more than 300 assets within its platform. BitGo is the security and
operational backbone for more than 400 institutional digital asset market participants in 50
countries, including many of the world’s top cryptocurrency exchanges and platforms.

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent Banking blueprint for the crypto world
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
Contact us

Arun Ghosh Sal Ternullo Sam Wyner Sydney Rice

One Americas Blockchain Director, One Americas Director, One Americas Associate, One Americas
& Cryptoassets Leader Blockchain & Cryptoassets Blockchain & Cryptoassets Blockchain & Cryptoassets
KPMG KPMG KPMG KPMG
617-988-1628 617-988-1153 212-954-4903 617-988-1000
arunghosh@kpmg.com sternullo@kpmg.com swyner@kpmg.com sydneyrice@kpmg.com

kpmg.com/us

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.
© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with
KPMG International Limited, a private English company limited by guarantee. All rights reserved.
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we
endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the
particular situation.