In recent years, there has been a significant shift in the perception of crypto assets. Unlike in the past, when crypto assets were considered fake and unserious, Bitcoin’s leading market position and multiple all-time highs have made it a widely accepted financial tool. As a result, crypto assets are no longer viewed as stuff merely for tech-savvy people. Today, they are a legitimate and valuable asset class added to institutions’ portfolios.

Indeed, today, we see that companies are showing interest in digital assets, which marks a crucial phase in the institutional adoption of crypto. Understanding the importance of due diligence is essential as these entities explore the crypto markets.

Understanding Institutional Involvement in Crypto

Institutional interest in crypto has soared as prominent financial institutions have started recognizing digital currencies’ potential. Entities like JPMorgan and PayPal, which have become among the first to embrace blockchain technology, exemplify this move. This level of institutional crypto trading is a robust indicator of growing crypto adoption.

Moreover, the approval of Bitcoin ETFs in January 2024 showcases the depth of institutional interest and recognition by regulations. These developments are not just milestones but are reshaping the foundation of traditional financial operations and how institutional investors interact with crypto markets.

While one of the most popular questions among young investors is how to create a crypto portfolio, institutional due diligence is no less important. It provides a critical foundation for financial safety, regulatory compliance, and strategic investment decision-making.

Key Considerations for Institutional Due Diligence

First, let’s clarify what companies and businesses relate to institutions in crypto. They are entities ranging from large-scale financial firms to specialized companies that provide specific services within the digital asset ecosystem. That includes:

• Regulated exchanges. Exchanges that comply with local regulations and offer a platform for institutional crypto trading. Such platforms often propose their native crypto, such as the WBT coin, that opens additional earning opportunities and programs for exchange users.
• Broker-dealers and trading firms. These firms facilitate buying and selling cryptocurrencies and other digital assets, offering liquidity and execution services for institutional clients.
• Custodians. Institutions that provide secure storage services for digital assets.
• Asset managers. Companies that manage investments in digital assets on behalf of their clients. These can be dedicated crypto investment firms or traditional asset managers expanding into crypto services.
• Banks and financial institutions – traditional banks and financial institutions that have expanded their services to include crypto transactions, custody, and investment opportunities. Examples include the aforementioned JPMorgan, Goldman Sachs, and Morgan Stanley.
• Investment funds. This includes hedge funds, private equity funds, and venture capital firms that invest in crypto and blockchain startups. Examples are Pantera Capital and Grayscale.
• Payment processors (such as PayPal) and business intelligent and software companies (such as MicroStrategy).

The journey into cryptocurrency adoption requires institutional due diligence. Key areas of focus should include:

• Governance. Institutions must ensure robust governance structures are in place to manage crypto assets effectively. That includes defining clear roles and responsibilities, ensuring operational resilience, and maintaining accountability at all levels of the organization.
• Compliance. The volatile regulatory environment of digital assets demands that institutions and virtual asset service providers (VASPs) keep abreast of current and forthcoming laws to maintain compliance. This covers everything from KYC/AML regulations to the latest crypto holding and transaction rules.
• Operations with crypto assets. Institutions should use advanced technology platforms for institutional crypto trading that ensure the safety and integrity of their crypto transactions and holdings. Operational tactics such as stablecoin management, staking, asset custody, account management, and security are important to reducing risks associated with digital assets.
• Financial risk management. Practical strategies for managing liquidity risks, assessing funding strategies, ensuring the quality and liquidity of digital assets, and supporting system infrastructures are essential. VASPs should implement measures to reduce financial risks, including stress tests for liquidity scenarios and frameworks to address credit and interest rates.
• Analysis and reporting. That includes performing on-chain audits to scrutinize transaction flows, asset management, and the initial distribution of digital assets. Monitoring key personnel holdings and transactions with related parties is crucial for maintaining transparency. VASPs need to evaluate counterparty risks and accounting treatments to have an understanding of financial health and vulnerabilities. 

The bottom line

Cryptocurrency adoption among institutional investors marks a transformative phase in the broader financial ecosystem. As these institutions delve deeper into the crypto space, the importance of a structured approach to due diligence cannot be overstated. 

The integration of digital assets offers a new way for diversification and growth, but it also comes with its set of challenges. Institutions must be proactive in their educational efforts, understanding the intricacies of cryptocurrency and implementing robust systems to manage and reduce associated risks. The successful crypto adoption will depend on how these institutions adapt to and influence the changing regulatory and technological framework.

Roberto Villa

Roberto Villa is the CEO, Founder, Executive Writer, Senior Editor of FightBook MMA. Has a passion for Combat Sports and also a podcast host for Sitting Ringside. He’s also a former MMA fighter and Kickboxer.