a16z Crypto: A New Approach for Financial Institutions to Go On-Chain

Author: Rebecca, Chief Operating Officer and Chief Legal Officer of Jito Labs

Compiled by: Jiahua, ChainCatcher

Many financial institutions are leveraging one of the most innovative advancements in blockchain technology: permissionless networks.

Franklin Templeton began utilizing permissionless blockchain to record the share information of its on-chain U.S. government money market fund as early as 2021, and integrated Solana into its supporting network in February 2025. BlackRock will issue tokenized money market fund shares on Ethereum starting in March 2024. In January 2025, Apollo also began offering tokenized investment channels for its Diversified Credit Fund on six permissionless networks.

Announcements of traditional financial institutions deploying products on permissionless networks appear almost weekly.

However, some traditional financial institutions still believe that permissionless networks are "inaccessible." Instead, many banks, broker-dealers, and asset management firms are gradually turning to permissioned networks. In such systems, gatekeepers or consortia decide who can validate transactions, who can use or participate in the network, and for what purposes the network can be used.

These institutions choose permissioned networks because they mistakenly believe this is a prerequisite for meeting compliance requirements. The underlying logic is that only a clearly identified and verified group of participants can meet the requirements of financial compliance laws, including anti-money laundering (AML) and counter-terrorism financing (CFT) regulations under the Bank Secrecy Act (BSA), as well as U.S. sanctions laws.

To put it bluntly, institutional compliance departments believe that permissionless networks are incompatible with the Bank Secrecy Act and sanctions laws.

Our newly published paper, "Compatibility of Permissionless Networks with Financial Compliance: A Practical Guide for Financial Institutions," points out that financial institutions can indeed build products and conduct transactions on permissionless blockchain networks. Concerns about financial compliance laws should not be an obstacle for institutions to use these networks, as existing laws are already capable of addressing relevant issues.

Financial institutions can fulfill their obligations through appropriate, risk-based compliance frameworks, setting controls at points they can actually manage.

From both regulatory and other perspectives, financial institutions are not obligated to own the underlying infrastructure, nor do they need to screen, review, or restrict the infrastructure that carries their financial transactions and related communications. In fact, regulators have explicitly acknowledged that financial institutions can adjust their financial compliance systems based on the technological innovation of "permissionlessness."

Are Permissionless Networks Really Incompatible with Financial Compliance Requirements?

The Bank Secrecy Act and sanctions laws require financial institutions to implement reasonable controls over risks and take measures to mitigate those risks, but they do not require the complete elimination of risks. The latter is an unattainable standard.

Under the Bank Secrecy Act, financial institutions' AML and CFT programs should focus on identifying, recording, and curbing illegal financial activities. These programs are neither intended to completely prevent money laundering or terrorist financing, nor can they achieve that.

U.S. federal banking regulators and the Financial Crimes Enforcement Network (FinCEN) have made it clear that the key to financial compliance lies in establishing "reasonably designed" AML programs, which should include "processes for effectively identifying, measuring, monitoring, and controlling risks."

FinCEN further clarified in its August 2020 "Enforcement Statement" that regulators enforce the Bank Secrecy Act not to penalize institutions for isolated errors.

The U.S. Department of the Treasury's report on "de-risking" directly addresses the concerns of financial institutions. Banks often believe that any internal control issue could lead to hefty fines. However, regulators point out that such fines are not common and typically occur in cases where the entire AML and CFT system has collapsed, rather than due to occasional shortcomings in a risk-based approach.

Sanctions compliance systems follow a similar logic.

The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) has outlined five core components of an effective sanctions compliance program in its "Compliance Commitment Framework": management commitment, risk assessment, internal controls, testing and auditing, and training.

OFAC adjusts the specific execution requirements of compliance measures based on the size of the institution, type of products, customer base, and the region in which the business operates.

The "Economic Sanctions Enforcement Guidelines" consider factors such as whether the institution acted intentionally, whether it was aware of the relevant actions, the harm caused to the sanctions target, and whether the compliance program was adequate when dealing with suspected violations.

The enforcement systems and historical practices of regulators support a "risk-balanced, rather than zero-tolerance" approach. The enforcement focus of FinCEN and OFAC is on systemic flaws that institutions can reasonably identify, rather than isolated individual errors.

This enforcement orientation is directly related to financial institutions' concerns about permissionless networks.

Whether in AML, CFT systems, or sanctions systems, the requirements are for control measures that match identified risks, and such controls can be fully implemented on permissionless networks. Violations caused by indirect paths or unintentional actions should not automatically be grounds for financial institutions to bear corresponding compliance risks.

Do Financial Institutions Need to Identify and Screen Every Validator?

Financial institutions should view permissionless networks as an infrastructure, just as they already view the public internet and telephone networks.

The public internet and telephone networks are shared systems, and financial institutions neither know nor screen the other users and operators within them. For permissionless networks, financial institutions should adopt a compliance approach that matches this.

Currently, financial institutions are cautious about permissionless networks, primarily concerned about inadvertently coming into contact with sanctioned entities or those engaged in illegal activities without their knowledge or active choice.

For example, financial institutions may worry about paying network fees to validators operating on behalf of sanctioned entities, inadvertently transacting with sanctioned entities, or receiving and trading cryptocurrencies that have previously interacted with illegal entities.

However, unintentionally coming into contact with validators or other network participants located in sanctioned jurisdictions is not the behavior that sanctions laws aim to regulate.

This issue is not solely about geographic location. A validator may be a sanctioned entity operating anywhere, but the financial institution did not actively choose that validator, did not contract with it, did not export goods or services to it, nor did it provide financing or engage in any other transactions with it.

The network fees ultimately reaching the validator are due to the network protocol applying the same rules to all users.

Regulators have confirmed this.

For instance, in November 2025, the Office of the Comptroller of the Currency (OCC) issued "Interpretive Letter 1186," confirming that banks can pay network fees on blockchain networks and can hold the cryptocurrencies needed to pay these fees in their own name.

This interpretive letter continues the OCC's position from "Interpretive Letter 1174," issued in January 2021, which stated that banks can run nodes to validate, store, and record payment transactions. Since banks can run nodes and participate in transaction recording, it is a natural extension of this conclusion that banks can collect network fees obtained from nodes.

The interpretive letter uses Ethereum as an example. Ethereum is a permissionless network whose protocol selects validators in a pseudo-random manner. This series of interpretive letters does not distinguish between permissioned and permissionless networks.

When a financial institution initiates a transaction through a permissionless network, the protocol assigns the block proposal rights containing that transaction to a specific validator. Typically, this process occurs in a pseudo-random manner and is proportional to the validator's stake.

The network protocol determines the corresponding fees based on network demand and the computational resources consumed by the transaction. Therefore, financial institutions cannot choose the validator processing their transactions, nor can they negotiate fees with the validator, and they cannot know which specific validator processed the transaction before or after it occurs.

All users on the network must follow the same rules.

This relationship is somewhat similar to that between an email sender and the router operator carrying the email, as well as the relationship between a telephone caller and the switch operator responsible for completing the call connection.

If an internet protocol data packet sent by a U.S. financial institution passes through infrastructure located in a sanctioned jurisdiction, it would not be deemed a violation of sanctions regulations solely for that reason. The same "neutral, protocol-automated transmission" analysis can apply to the consensus layer of permissionless networks.

The Bank Secrecy Act itself acknowledges this distinction. The Act explicitly excludes entities that "provide delivery, communication, or network access services solely used for funds transfer services to support funds transfer services" from regulatory definitions.

The Bank Secrecy Act distinguishes between neutral transmission and transactional behavior, and sanctions analysis similarly focuses on whether there is active selection, instruction, or transactional behavior in the relationship between the parties.

While financial institutions may indeed encounter some contact with unvetted network operators when transacting on permissionless networks, this contact is not the same as the behavior regulated by sanctions laws.

In the latter case, neither party has actively chosen the other.

From a broader perspective, nearly five years have passed since OFAC issued its "Sanctions Compliance Guidance for the Virtual Currency Industry." During this time, there have been no enforcement actions based on a block proposed by a validator that just happened to contain a transaction involving a sanctioned entity, nor have there been any enforcement actions due to market participants paying network fees at the protocol level.

Can Public Ledgers Balance Privacy and Compliance?

The second concern raised by institutions is privacy: can banks conduct transactions on a public ledger without exposing client positions, counterparties, and trading strategies to competitors?

The primary rationale for early support of permissionless ledgers was the belief that full transparency could itself become a compliance asset.

However, the actual requirements of financial compliance are narrower: necessary information must be verifiable by financial institutions, counterparties, and regulatory or supervisory bodies.

Today, cryptographic technologies have advanced to the point where institutions can prove a compliance-related fact without publicly disclosing all the data underlying that fact.

For example, institutions can prove that a counterparty is not on the Specially Designated Nationals (SDN) list, or that reserves exceed liabilities, without disclosing the contents of the ledger or the identity of the counterparty.

Source verification can allow one party to prove that an asset originates from a previously identified set of illegal assets without publicly disclosing the complete transaction relationship map.

Confidential transfer solutions can encrypt the amounts and balances on the ledger while retaining a viewing key for financial institutions to provide to auditors during inspections.

These cryptographic technologies, when combined, can provide regulators with stronger verification assurances than closed systems, while not disclosing any information to competitors.

As a result, privacy is no longer a barrier to using permissionless networks; instead, it may become a reason for financial institutions to choose such networks.

Some of these technologies have already been put into use, while others are still in the research and development stage.

Address rotation and account abstraction have entered practical application. Aggregate accounts and layered custody structures can also retain detailed client-level information outside of the ledger. Meanwhile, relevant messaging protocols can transmit "travel rule" data while transferring on-chain.

Confidential transfer solutions with audit keys have begun deployment, but their application in institutional business remains limited at present.

Solutions for proving that entities are not subject to sanctions, as well as those for proving the source of assets against specific lists, are still in pilot and research stages.

However, relevant solutions do exist. For example, Privacy Cash is a privacy protocol deployed on Ethereum and Solana that utilizes zero-knowledge proofs to support confidential transfers and exchanges.

How to Establish a Compliance Framework?

We propose a financial compliance framework suitable for activities on permissionless networks, consisting of nine components.

Among them, transaction layer controls primarily target institutional clients and counterparties, and their form is generally similar to the controls currently used by financial institutions; network layer controls target the underlying infrastructure itself.

These measures do not require financial institutions to identify validators, nor do they require signing a service level agreement with a specific protocol, and they certainly do not require applying for network membership from a gatekeeper. These are typical characteristics of permissioned networks, but current financial compliance laws do not impose such requirements.

This framework is also consistent with the recently passed "GENIUS Act" in the United States.

The "GENIUS Act" adopts a similar framework: anti-money laundering, anti-terrorism financing, and sanctions control measures should be placed at the application layer, to be executed by entities that understand customer identities and can control assets.

The act requires issuers authorized to issue payment stablecoins, as clearly defined regulated entities at the application layer, to prove that they have established anti-money laundering and sanctions compliance programs and possess the technical capability to freeze or destroy circulating stablecoins under lawful orders.

These obligations are borne by the stablecoin issuers, not by the permissionless networks where the stablecoins circulate.

Decades ago, regulated financial institutions also faced an open, global, permissionless network. Anyone could join this network, which carried communication traffic from both legitimate and illegitimate users.

Financial institutions ultimately built their businesses on the open protocols of the internet and established corresponding controls at the application layer.

Today, permissionless networks can adopt this approach as well.

Avoiding permissionless networks is not a financial compliance strategy; rather, it is a relinquishment of the role that U.S. financial institutions have long played in enhancing the resilience, information transparency, and risk management capabilities of the U.S. dollar financial system.

In fact, dollar-denominated activities have already occurred on permissionless networks and will continue to develop, regardless of whether U.S. financial institutions participate.

Whether U.S. financial enforcement can effectively cover relevant activities depends on whether regulators can see financial flows. The institutional design, execution, and enforcement behind financial compliance laws also rely on U.S. financial institutions actively observing and monitoring these activities.

If financial institutions choose to avoid permissionless networks due to misreading relevant laws or concerns about past regulatory stances, they will ultimately lose the opportunity to provide more products and services to clients using open networks.