Your Crypto Company Needs a Vendor & Partnership Due Diligence Policy

August 1, 2023
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Navigating and Choosing the Right Allies in the Crypto-Sphere to be your Vendor or Partner

Whom does this policy address?

The dynamic terrain of the crypto-world, marked by relentless innovation and the watchful eyes of regulatory bodies, requires companies in this domain to proactively shield their operations. While digital currencies like Bitcoin open a realm of exciting opportunities, every shiny prospect isn’t necessarily a golden one. Recognizing and managing the risks inherent in dealing with third-party vendors and partners is crucial to safeguarding your business and building a solid foundation into the future.

Dissecting the ‘Third-Party’ Concept 

In the context of the crypto-scape, a ‘third-party’ refers to any external entity that a cryptocurrency business collaborates with. This broad category includes tech solution providers, professional services firms, and distribution partners, among others. Thoughtfully analyzing these third-parties is a fundamental step towards effective risk management and sets the stage for a thorough evaluation procedure.

Evaluating Risks: Crucial Determinants When Vetting Vendors & Partnerships 

Forming a partnership or contractual agreement with vendors in the crypto realm should pivot on meticulous due diligence and risk mitigation procedures. From potential data security breaches that may leak critical customer information, to assessing the financial robustness of the vendor or partner, compliance with regulatory requirements, and potential reputation risks – every facet counts.

The Acid Test: Vendor & Partnership Policy Scrutiny

vendor & partnership due diligence in crypto

In order to mitigate these risks, a systematic due diligence procedure is critical. This procedure revolves around assessing:

1)      The business practices, history, ambitions, and compliance status of the organization

2)      Their adherence to risk management procedures and compliance

3)      Negative/adverse media checks

4)      Third-party relationships or parties linked to the partner or vendor

5)      The management team of the potential partner or vendor

6)      The financial health of the partner or vendor, including insurance coverage 

The final evaluation should accumulate key findings, highlight potential risks, decide on the suitability of the potential partnership, and pinpoint any further inquiries.

FDIC Interagency Guidance on Third-Party Relationships: Key takeaways

In general, the response to the new FDIC guidance on third-party risk management was positive. While some individuals believed it was too prescriptive, others felt it provided the right amount of information for risk-based decision-making. Some also expressed a desire for more specific standards or greater clarity on supervisory expectations. The incorporation of concepts from OCC FAQs was also subject to varying perspectives.

In response to the feedback, the agencies clarified that the guidance does not impose new requirements, while highlighting the importance of tailoring risk management processes to the individual characteristics and risks of each organization. They maintained the broad scope of the terms “business arrangement” and “third-party relationship,” while emphasizing that not all relationships require the same level of oversight or risk management. There were also revisions to the term “critical activities” to focus on activities that could pose significant risk if the third party fails to meet expectations.

FDIC Guidance on Terminology and Scope


The commenters also raised concerns about the need to tailor the guidance to meet the needs of different organizations, particularly community banking organizations. They suggested that smaller organizations may not need to follow the same risk management approaches as larger ones. In response, the agencies acknowledged the importance of tailoring risk management practices to the size, complexity, and risk profile of each organization. They streamlined and simplified certain sections of the guidance to provide greater clarity and flexibility, particularly for community banking organizations.

Specific concerns were also expressed about subcontractors and the challenges of overseeing and conducting due diligence on them. The agencies acknowledged the added complexity and revised the guidance to focus on evaluating a third party’s own processes for overseeing subcontractors. They made changes to promote flexibility and removed the term “critical subcontractor.”

Overall, the agencies addressed the feedback by clarifying and streamlining the guidance. They emphasized the principles-based approach and the need for organizations to adapt risk management practices to their specific circumstances. They also highlighted the importance of oversight and accountability throughout the risk management life cycle. Additional concerns raised by commenters were acknowledged and the agencies incorporated relevant concepts from OCC FAQs. The agencies did not address specific topics or types of relationships in the guidance, but indicated their willingness to issue additional guidance or resources as required.

3 recommended actions businesses should consider:

Thoroughly screening vendors and partners

It’s important to understand that regulators expect you to know the vendors and partners you’re working with, much in the same way you are expected to know your customer and their financial dealings (i.e., KYC). Fintechs should reassess their existing due diligence package offered to banking partners, taking the guidance’s recommendations into account.

Although not specifically referencing crypto, FDIC’s guidance to fintechs serves as an informative and appropriate place to start.

FDIC Guidance

Stay ahead of evolving regulatory expectations and actions

Whether you’re a newcomer or a seasoned player, keeping an eye on ever-shifting regulatory guidelines is an integral part of third-party risk management. The landscape is subject to constant flux, as we know, making it all the more crucial to stay updated on changing norms.

Formalizing your screening process

Building an all-encompassing, effective, and pragmatic framework from the onset is key to fostering future success. Initial development phases will primarily involve setting up procedures for evaluating each prospective vendor’s risk profile, performing due diligence, handling contracts, and overseeing vendors. While setting up this infrastructure might be demanding, a firm foundation will simplify future maintenance greatly.

No matter the size of your business, you need to formalize your vendor & partnership due diligence into a written policy. Having a more formal process will help mitigate risk and ensure an equitable and fair process for vetting and ultimately selecting your vendors and partners.  

Bottom-line: Having a more formal process will help mitigate risk and ensure an equitable and fair process for vetting and ultimately selecting your vendors and partners.  

Given the rapid proliferation of fintech and crypto services, companies must employ a discerning lens and remember that their affiliations will inevitably shape their reputation. The practice of meticulous third-party vetting is not just desirable, but indispensable. 

Take a proactive stance on compliance to ensure your third-party risk management strategy withstands regulatory oversight and prospers in this innovative digital era. Connect with BitAML specialists to design a unique AML framework tailored to your third-party due diligence policy, adopting the best practices in partnership and vendor due diligence. Reserve your complimentary discovery session today.

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