Circle and Deutsche Bank’s Crypto Custody Announcements Put KYC/AML Under Spotlight

Crypto has long been, and still can be, a safe haven for bad actors. That simple fact has long made digital asset custody a thorny issue.

Providing a safe haven for crypto could ultimately result in bad actors finding their own safe haven within the American financial system. While custody in traditional finance is the boring backbone of asset safety, in crypto, it’s a technological and regulatory minefield.

But with the news Tuesday (July 1) that Deutsche Bank is planning to debut its cryptocurrency custody service in 2026, while on Monday (June 30) news broke that stablecoin issuer Circle is seeking a charter for its own national trust bank, it’s clear that, thorny or not, digital asset custody has started to capture the attention of both traditional institutional players and FinTech platforms alike.

Custodians, by design, are chokepoints in the financial system. They hold assets on behalf of multiple institutions, acting as both gatekeepers and facilitators. With decades of institutional custody experience, Deutsche Bank’s entrance suggests that the lines between crypto assets and traditional ones could be blurring fast, while Circle’s bank application underscores that crypto firms feel ready for the type of direct supervision and regulatory compliance standards as federally chartered institutions.

As the crypto industry matures, the lines between custody, banking and compliance are blurring. Custodians are no longer just service providers; they are gatekeepers of financial integrity. And in this new era, the simple-sounding disciplines of KYC (know your customer) and AML (anti-money laundering) are just as much of a must-have for crypto as they are in traditional finance.

Read more: New US Stablecoin Reserve Rules Could Upend Crypto’s Biggest Players

Custody Is Front Line Against Crime

As the custody layer of crypto matures, regulatory expectations around identity verification, transaction monitoring, and risk controls are intensifying.

In traditional finance, custody is a specialized but invisible operation, one that is safe, regulated, and mostly taken for granted. Custodians like BNY Mellon or State Street manage trillions of dollars in securities with little public attention. In crypto, however, custody is far more consequential.

Crypto assets are bearer instruments, meaning if someone controls the private keys, they control the asset. That makes custody both a technical and legal question, and a risk vector for institutions.

At the heart of this transformation lies the global effort to align crypto firms with anti-money laundering standards. In traditional banking, the Bank Secrecy Act (BSA), the USA PATRIOT Act, and FATF recommendations provide a framework for ensuring that financial institutions know their customers and report suspicious activity. Crypto, born of pseudonymity and decentralization, has long resisted these mandates.

Indeed, the very architecture of crypto makes it attractive to criminals. Much of the illicit activity flows through noncompliant custodians, loosely regulated exchanges, or decentralized protocols where KYC is nonexistent. For institutional players and regulators alike, this is an unacceptable risk.

If you want to stop North Korean hackers or Russian operatives from laundering money through the U.S. banking system, you need to know who controls the wallets, who authorized the transaction, and who is responsible for reporting it. That means custodian-level controls.

Read more: From Bitcoin Maxis to Yield Farmers: A Crypto Archetype Glossary

Crypto’s Bankification Moment

But an existential challenge remains: Can crypto build the same foundations of trust that underpin traditional finance? Or will traditional finance step in and usurp the crypto opportunity with their superior compliance tools and AML programs?

“Banks are in the state where they are thinking about blockchains as public infrastructure that they need to rely on,” Chainalysis Co-Founder and CEO Jonathan Levin told PYMNTS in April.

There is still no global consensus on how to regulate custodians, particularly in cross-border contexts. And with the rapid rise of tokenized assets — from real estate to Treasurys — the custodial footprint is expanding into uncharted territory.

Yet, at least in the U.S., regulatory momentum appears to be positive and growing.

“There’s certainly a change in how the administration views the digital assets industry,” Dan Boyle, partner at Boies Schiller Flexner told PYMNTS in an interview posted April 23. “This is not a confrontational posture.

“The obvious growth in stablecoins and the fact that you have a lot of issuers ready to be fully compliant, it’s a hard argument for Congress to ignore,” Boyle added.