With digital currencies being the only markets experiencing whipsaw-like volatility, it comes as no surprise that banks and broker-dealers want in on the action.

Goldman Sachs reportedly has been pondering whether to enter the market and Citi CEO Jamie Dimon, who called bitcoin a fraud, has vowed not to discuss the digital currency further, according to CNBC reports.

However, can Wall Street take something that was designed to be anonymous and work outside “the system” and make it work inside the system?

Federal and state regulatory know-your-customer and anti-money laundering requirements may bring the plans of financial institutions to a halt, according to panelists speaking during a security in a decentralized environment conference hosted by Bloomberg BNA.

The US Department of the Treasury’s Financial Crimes Enforcement Network defines all virtual currencies as the equivalent of money transfer, which is regulated at the state level, according to Ronald Schwartzman, CFO and general counsel at UniTeller Financial Service.

“Given that definition, if you are involved you need a money transmission license, or you are going to be in violation of those laws in every one of those states,” he said. “Despite what FinCEN said, the states are trying to decide whether money transfer includes digital currencies.”

Some states will not issue a license at this point because they have not figured out how to do it, Schwartzman added. “You could be in violation of the law in the state even though the state will not allow you to get a license.”

The most significant sticking point from an AML perspective is the anonymous nature of most digital currencies. Schwartzman noted that his firm, like many money transfer firms, is wrestling with the issue and do not allow digital currencies in the firm’s network.

Institutions can examine a digital currency’s blockchain and trace the token’s past 10, 1,000, or 10,000 transactions, but what do they do when the source of the token is an IP address or URL?

“Not only do you not know where the money came from but more problematic is where the money is going and defining who the beneficiary is,” said Schwartzman. “Again, when you have an IP address that is outside the US and nothing else, you do not know if that person is a member of ISIS or any other illegal trade entity.”

Regulators and fintech firms eventually will develop a process to determine whether you can legally trade with a counter-party, according to Kari Larsen, a counsel at Reed Smith.

“It will be very jurisdiction specific,” she said. “And in the US, it can be very state specific. Then they would have to qualify as a money transmitter under state law, get a license, and comply with AML and KYC regulations.”

For financial firms elsewhere, the regime will be different, she added. “In Europe, they’ve proposed that virtual currencies be included in their fourth AML directive. But currently, only Italy has adopted that and included virtual currency. It is still in process.”