How should regulators build a modern compliance framework for digital assets without forcing crypto into outdated categories?

Why modern compliance for digital assets starts with the underlying rail, not the label

Regulators do not need to treat digital assets as a novelty category so much as a new operating environment with familiar control problems: custody, transferability, market abuse, tracing, consumer disclosure, and operational resilience. The more effective approach is to regulate the activities and risks that public blockchains create, then calibrate controls to how those systems actually settle, verify, and expose transaction data.

That is why a modern framework should be principles based rather than product based. It should ask what the asset does, how it moves, who can control it, what evidence exists on-chain, and where intermediaries create new points of failure. The same logic also supports a clearer division between prudential, conduct, AML, and enforcement objectives, instead of forcing one outdated taxonomy to do all the work.

Transparency is one of the biggest advantages regulators can use, but only if they build for it. Public ledgers can improve traceability and supervision, yet that benefit is weakened when rules assume every token, wallet, or protocol behaves like a traditional financial instrument. The right framework recognises that digital asset oversight often needs to map activity, not just classify an instrument. For an established governance lens, see Ultimate Guide to NHIs, Regulatory and Audit Perspectives.

For the same reason, regulators should design for coordination across agencies and data sources. A single rulebook rarely covers market integrity, custody risk, sanctions exposure, consumer harm, and criminal typologies at once. The practical answer is an adaptable supervisory model that can absorb new products, new intermediaries, and new abuse patterns without rewriting the entire compliance structure every time the market changes. That need for adaptability is visible in a number of real-world compromise patterns, including legacy account abuse and credential theft such as Microsoft Midnight Blizzard breach and JumpCloud Breach.

What regulators should build into the framework itself

The core design should separate baseline obligations from activity-specific controls. That means minimum expectations for governance, recordkeeping, market surveillance, custody controls, and incident reporting, plus targeted rules for higher-risk activities such as stablecoins, exchanges, brokers, wallets, and cross-border transfers. It also means creating definitions that follow control reality, not legacy asset labels. If a product behaves like a payment rail, a custody service, or a market venue, the framework should regulate those functions directly.

Compliance should also be evidence driven. Regulators need access to traceable transaction records, attestations, audit trails, and clear ownership for operational controls. Where possible, oversight should reward systems that improve visibility and traceability rather than penalise them for not fitting older reporting templates. A useful precedent for this control-and-evidence mindset is the ISO/IEC 27001:2022 Information Security Management approach, which expects governance, accountability, and continuous improvement rather than one-time certification.

Consumer protection should be built around disclosure quality, conflict management, custody segregation, and recovery expectations. That is especially important in digital asset markets because harm often comes from operational design, not only from fraud. Weak key management, poor access controls, or third-party concentration can create losses even when the token itself is functioning as intended. Regulators can strengthen that layer by aligning obligations with operational security controls such as the ISO/IEC 27002:2022 Information Security Controls and the SOC 2 Trust Services Criteria.

For financial crime controls, the framework should support travel-rule style information sharing, beneficial ownership visibility, and suspicious activity escalation without assuming that every digital asset actor is a bank. The important move is to set outcome-based requirements that can be applied consistently across custodians, exchanges, and other intermediaries. That is also where cross-border alignment matters, because fragmented rules create regulatory arbitrage and uneven enforcement. FATF Recommendations, AML and KYC Framework remains the strongest global reference point for that part of the design.

Risk and Threat Considerations

Digital asset compliance fails when regulators classify by label instead of by control weakness. That creates blind spots around custody concentration, sanctions evasion, market manipulation, stolen credentials, and fast-moving cross-border abuse patterns. A framework that cannot adapt to new typologies will be easy for sophisticated actors to route around.

Failure mechanism: Outdated categories cause supervisors to miss the actual control point, such as wallet control, exchange intermediation, or transaction traceability, and therefore apply the wrong rule to the wrong actor.

Impact: That increases exposure to consumer loss, weak enforcement, inconsistent AML outcomes, and fragmented oversight that criminals can exploit across jurisdictions.

Practitioner Guidance

What to prioritise: Regulators should define obligations by function first, then map those obligations to product types only where doing so improves clarity. The practical test is whether the rule still works when the instrument changes form but the risk does not.

What to verify: A modern framework should require evidence that firms can demonstrate custody controls, transaction traceability, incident reporting, and change management for new products before they scale. If a venue cannot explain who controls keys, who can move assets, and how exceptions are escalated, the supervisory model is too weak.

Decision rule: If a digital asset activity creates custody, settlement, or surveillance risk, regulate the activity directly; if it mainly creates reporting or disclosure risk, calibrate controls to the intermediary role rather than the token itself.

Practitioner takeaway: The best framework does not force crypto into legacy boxes, it preserves the regulatory objective while letting the control model follow the technology, the activity, and the evidence trail.

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