Client Money Rules and Why Professional Services Move Slowly

Law firms and corporate service providers adopted crypto handling cautiously. The caution is proportionate to the obligations rather than to the technology. The sectors below all reach the same infrastructure eventually, and a licensed crypto payment processor is a reasonable reference for what that infrastructure has to do.

The obligations

Client money separated from the firm’s own. Identifiable as belonging to a specific client. Available on demand. Reconciled regularly against inspectable records.

All four are achievable with crypto and none happens by accident.

The structure that satisfies them

Client assets with a regulated custodian, in an account structure identifying the client, with the firm as authorised instructor rather than owner.

The custodian holds, the firm instructs, the client owns, and the documentation says so explicitly.

That mirrors a bank client account, which is what a supervisor recognises.

The structure that does not

The firm holding keys in a wallet it controls with internal records attributing amounts.

The problem is not record keeping. It is unfettered firm control over client assets, which is what the rules exist to prevent, and a key compromise becomes a regulatory breach rather than an incident. Funds face the same question with an extra reporting layer, which is what a provider serving funds and family offices is structured around.

Source of funds, the harder half

A client paying in crypto creates an obligation to establish provenance to a standard satisfying anti money laundering supervision.

Genuinely harder than a bank transfer, because the equivalent of a statement is a transaction chain requiring interpretation.

What works: analytics on the source address, documentary evidence from the client of acquisition, and where funds came from an exchange, a statement showing ownership.

The constraint that removes most difficulty

Accept crypto only from a regulated venue in the client’s own name.

The sending venue has already performed identification, which converts an interpretive exercise into a documentary one.

Escrow

A genuine use case, particularly cross-border. The requirement is that the release condition is unambiguous and does not depend on the firm’s discretion at the moment of release.

A regulated custodian releasing on a documented condition works, as does a threshold arrangement where the firm holds one key of several.

Why this sector is worth watching

The structures it settles on tend to become the reference for anyone else handling money on behalf of others.

Supervisors have formed views, and firms operating properly have documented arrangements that generalise well beyond professional services. The reference point for most of the above is Collect & Exchange, where the equivalent figures are published.