As traditional financial institutions navigate the evolving digital assets landscape, few legal practitioners bring the unique combination of regulatory expertise and practical implementation experience as Joseph E. Silvia. As a Partner at Duane Morris LLP and member of the firm's Digital Assets and Blockchain Group, Joe combines his extensive background in banking law with deep insights into cryptocurrency regulation and compliance.

Joe's distinguished career includes serving as counsel to the Federal Reserve Bank of Chicago, where he focused on the supervision and regulation of banks, bank holding companies, and savings and loan holding companies, along with consumer finance and compliance matters. This federal regulatory experience provides him with invaluable insights into supervisory expectations and regulatory priorities that financial institutions must navigate when entering the digital assets space.

At Duane Morris, Joe represents a broad spectrum of clients including international, national, regional and community banks, fintech companies, credit unions, and corporations on corporate and regulatory matters spanning mergers and acquisitions, strategic transactions, payments systems, anti-money laundering compliance, and digital asset integration. His expertise covers everything from traditional banking services to cutting-edge areas like digital currencies, blockchain technology, and third-party fintech partnerships.

With the recent FHFA directive allowing Fannie Mae and Freddie Mac to consider cryptocurrency as an asset for mortgage lending, and the current administration's pro-crypto stance creating new opportunities and challenges, Joe's perspective on regulatory evolution is particularly timely. He regularly speaks on topics including "Cryptocurrency & Compliance: Tackling AML Challenges in the Digital Age" and "Crypto, Digital Assets and the Future of Money," making him a sought-after voice in the intersection of traditional banking and emerging digital asset technologies.

In this comprehensive discussion, Joe shares practical insights on how banks can successfully integrate cryptocurrency services while maintaining regulatory compliance, what supervisory concerns institutions should anticipate, and how to structure partnerships with crypto companies and fintech firms. His approach reflects both the regulatory rigor expected in traditional banking and the innovative thinking required to succeed in the rapidly evolving digital assets ecosystem.

Question 1: Bank-Fintech-Crypto Integration Strategy

"As someone with extensive experience in bank-fintech partnerships and as a member of Duane Morris' Digital Assets and Blockchain Group, how do you advise traditional banks on integrating cryptocurrency services while managing regulatory compliance?

Great question. To take a quote from author Simon Sinek I typically “start with why?” Some banks will have a clear idea of why they want to engage in providing some kind of service related to cryptocurrency - whether it's customer demand, geographic location in an area where they believe there to be demand, or some other utility the bank seeks. However, most banks that I talked to are simply unsure of where to start or why to engage in these kinds of services. If that is the case then typically we start with a conversation about what the most common options are in the traditional banking sector for engaging with and or providing cryptocurrency-related products and services. We would typically discuss options such as custody of digital wallets acquisition of digital assets as an investment tool safekeeping of reserve funds that support a cryptocurrency or stablecoin, or some other activity that we're seeing in the market.

Once we get a good sense as to the appetite of the bank with regard to risk and novel products and services we begin to discuss the regulatory overlay. We walk through different regulatory obligations and expectations related to any number of these products or services or activities and typically end up in a place where the bank looks to enter the shallow water instead of diving in to the deep end.

"Given your background at the Federal Reserve Bank of Chicago, what are the key supervisory concerns banks should anticipate when offering digital asset custody or trading services?"

With respect to providing digital asset custody or trading services the first thing that I would advise a bank to consider is capacity and expertise. That is to say does the bank have the requisite staff and management with an adequate amount of expertise and actual experience with digital asset custody and/or trading. It is likely going to be the case as well that there will be a material amount of discussion with supervisory functions at federal and state banking agencies that focus on the novel nature of digital asset products and services. Supervisory staff will typically ask about not only the capacity to handle such services and the expertise to handle such services but we'll also expect to see some kind of written review of the assessment of risk to the institution, as well as expectations around the volume of activity and even revenue expected with respect to digital asset services.

Question 2: Regulatory Evolution Under New Administration

"With the recent FHFA directive allowing Fannie Mae and Freddie Mac to consider cryptocurrency as an asset for mortgage lending, and the Trump administration's pro-crypto stance, how do you see banking regulations evolving for digital assets?"

I expect the regulations to continue evolving for some time yet. Under this administration, the regulations will likely evolve with greater flexibility in order to support or even encourage the intersection of banking and digital assets.

We've already seen the passage of the genius act and we've already seen a number of states that have increased the attention that they are giving to the digital asset community at the statutory and regulatory level. I'm hopeful that as this administration continues to promote the digital asset sector broadly that we will see legislation that is more comprehensive with respect to the market and for digital assets and its overall structure. I think most of the legitimate participants in the digital asset community are simply looking for structure and clarity around the rules of the road. Right now, many of them are simply flying blind hoping that what they're doing is reasonable, appropriate, and will pass regulatory scrutiny, whenever that may come.

"What practical steps should banks take now to prepare for this changing regulatory landscape, especially regarding AML/BSA compliance in crypto transactions?"

Currently, the 1st and most important step is to pay attention. The digital asset ecosystem is evolving every day with new products services an opportunities. Therefore, banks need to start by learning about the industry and its products services and possibilities. The next step is to look at the options that might fit with the customer base, expertise, and capacity of the bank. We want to focus on practical use cases for the individual bank subject to it its risk profile and risk appetite the key is to not rush into anything but also not to stick your head in the sand.

For banks that are planning to engage with cryptocurrency or digital assets in some way we expect the initial regulatory construct to look very similar in terms of expectations around risk assessments updates to policies and procedures and updates to the broader risk management framework. This is especially the case with AML compliance. Traditional financial institutions sometimes have a perspective that cryptocurrency is simply a way to make it easier to launder money and conduct criminal activities. And certainly, that has happened and it will happen but that also means that for the banks that are going to actively engage with this community they should expect to implement enhancements to their AML compliance programs enhancements in terms of potentially technology to review transactions updated policies and procedures around customer due diligence an updated staff expertise on reviewing for red flags and unique scenarios.

At the end of the day banks need to make sure that no matter what they focus on the fundamentals of their compliance programs and especially their AML compliance programs regardless of the product service or ecosystem that they may be serving.

Question 3: Third-Party Risk Management in Crypto Partnerships

"Given your expertise in third-party risk management and vendor agreements, what are the unique due diligence considerations banks must address when partnering with crypto companies or fintech firms offering digital asset services?

How should banks structure these partnerships to satisfy both federal banking regulators and state money transmission requirements?"

Another great question. I think the unique considerations especially in the due diligence phase of establishing a partnership will focus on the unique nature and expectations related to the underlying technology and capacity of the partner fintech or crypto company to comply with the more traditional financial regulatory structure. Some of the due diligence considerations will certainly focus on the youth of the industry and likely the relative youth of the particular fintech or crypto company such that it may be more challenging to look at the partners in terms of financial statements and traditional corporate structure because many of these partners could look more like startup companies with less structure and less architecture behind their controls and governance.

It seems to me that a lot of the due diligence with respect to these companies will be critical when it comes to reviewing the actual individuals that will be engaged with the partnership. Indeed, if the partnership is to involve more than just utilization of a particular technology, the people involved in the partnership will be critical when it comes to compliance obligations, reporting and recordkeeping obligations, and notification obligations in the event of some system or compliance misstep. The due diligence in this area will need to be robust and comprehensive to assess potential risks and failures so as to limit exposure for the bank and its customers.

Want to contribute to our Q&A series? If you're a legal expert in the web3/AI space and would like to share your expertise by joining our Q&A series, please reach out to hi@databirdjournal.com