Institutional investors are entering the crypto space in force. According to a July 2025 report by CoinShares, year-to-date inflows into digital asset investment products reached an all-time high of $27 billion, pushing total assets under management to $220 billion. This surge confirms that digital assets are increasingly being treated as a strategic part of diversified portfolios. But with this shift comes new expectations, shaped by decades of exposure to the rules of traditional finance markets. Strict governance, robust compliance and operational discipline are the new “must-haves.”
Meeting those expectations means rethinking risk management to develop a comprehensive framework that covers custody, operational governance and structural integrity. The key to making this leap? Institutional infrastructure and regulatory clarity.
The institutional playbook, rewritten for crypto
In traditional finance, risk is a measurable, manageable component of any strategy—provided the right systems are in place. When it comes to crypto, however, the risk landscape is different, and so the systems have to adapt.
Market risk is a given in crypto’s highly volatile environment. Monitoring it effectively requires tools that recognize the distinct profile of this asset class. Perpetual futures and options are a staple in crypto strategies, which means accurate leverage calculations and real-time data pipelines are essential. Traditional Value-at-Risk models often fall short due to crypto’s fat-tailed return distributions, prompting managers to rethink how they measure and manage downside exposure.
Liquidity risk is also evolving. In traditional markets, access to liquidity is usually stable and well-mapped. In crypto, it’s essential to align liquidity metrics like order book depth and trading volume with how a fund can access the market. Misjudging liquidation capacity can mean serious trouble during periods of stress or rebalancing.
Counterparty risk carries an added weight. In crypto, exchanges and custodians often perform dual roles, executing trades and holding assets. This increases exposure and makes them both operational partners and single points of failure. Institutional investors now routinely require that all counterparties undergo extensive due diligence both at onboarding and at regular intervals. The objective here is to ensure that high standards are maintained, even in less-regulated jurisdictions.
Sustainability risk is another emerging consideration. Though less discussed and often overlooked in crypto, its assessment is becoming more relevant. The performance of the fund and crypto asset prices may be highly dependent on energy consumption (environmental), linked to geopolitical instability (social) and rely on mechanisms like decentralized autonomous organization structuring and a voting system (governance). These factors are quickly becoming integral to comprehensive risk assessments.
Redefining custody standards for digital assets
Custody remains one of the most critical concerns for institutional investors wishing to allocate capital to crypto. The expectation is clear: crypto custody must meet or exceed the standards applied in traditional finance, particularly those outlined in the AIFMD regulatory framework
For digital assets, this means full segregation of assets: on-chain through dedicated wallet infrastructure and off-chain through legally ring-fenced accounts. It means no commingling of assets, no proprietary use and complete transparency around asset ownership.
Moreover, investors demand institutional-grade key management. Think multi-party computation, hardware security modules and strict access protocols. Wallet access and private keys must be governed by predefined, auditable roles, dual-authorization protocols and clear segregation of roles between the fund manager and the custodian itself. These controls are key to ensuring a good operational framework and to preventing unauthorized transfers, similarly to depositary oversight in the traditional finance world.
Custodians operating under the E.U.’s Markets in Crypto-Assets (MiCA) regulation or equivalent frameworks are increasingly viewed as the pillars of trust. Insurance coverage against operational failures or theft, combined with comprehensive business continuity plans, helps to close the trust gap for institutions.
Operational governance: the AIFM advantage
The transformation of crypto fund management is being driven by the integration of traditional fund structures into the digital asset space. Chief among them: the Alternative Investment Fund Manager (AIFM) model.
In a traditional alternative investment fund, governance is built around role separation, committee oversight and compliance-driven processes. By mirroring that structure in crypto, regulated AIFMs can bring the same rigor to risk and portfolio management.
A robust AIFM setup includes:
- Investment committees that validate proposals, monitor exposures and ensure alignment with the fund’s investment strategy
- Valuation committees that oversee pricing models and resolve discrepancies
- Risk teams and committees that run stress scenarios, monitor risk thresholds and oversee the implementation of mitigation measures
This framework isn’t just theoretical—it functions in practice. And it’s a major reason why fund promoters looking to build trust with institutional allocators are increasingly aligning with licensed AIFMs.
Regulatory clarity changes the game
Regulatory clarity is a key catalyst for institutional adoption of crypto assets. A comprehensive framework like MiCA has marked a significant step forward by introducing a single unified rulebook across the member states for issuers, service providers and fund managers. For institutional investors, that means clearer rules around custody, anti-money laundering and countering the financing of terrorism (AML/CFT) compliance, governance and capital requirements. It enables institutional investors to better assess counterparties and build compliant investment vehicles.
By creating parity between crypto service providers and traditional financial institutions, MiCA helps create more confidence in the ecosystem and allow greater capital attraction into the space. But the E.U. is not the only one that benefits from this shift. Fund managers operating across other jurisdictions now have a reference point to guide their own frameworks, bringing transparency to areas of operational risk that were previously opaque.
The image of crypto as the “wild west” of finance is fading. As infrastructure and oversight mature, institutional capital is flowing into the sector not by making exceptions to its standards, but by applying them with precision.
<
