For almost every onboarding application a crypto company submits to a bank, crypto exchange, or other financial institution, source of funds (SOF) information will be requested. In addition, the applicant may also be required to provide source of wealth (SOW) information, depending on factors such as the applicant's risk score, jurisdiction, entity type, net worth or expected account usage.
These requirements regularly cause confusion, delays, and unnecessary back-and-forth for applicants — so how can they be understood in simple terms?
Source of funds
SOF is perhaps the more straightforward of the two. It asks where the applicant's money is currently derived from to fund this specific account — in other words, how an applicant intends to fund the account. A business account applicant, for instance, might say it will fund the account from its ongoing business revenues or the company's own assets.
Source of wealth
SOW, on the other hand, asks a different question. For an established business, it asks how the company has accumulated its wealth over time, which can include sources such as retained profits and assets built up over the years the company has been operating. For a newly formed business, it asks what the initial source of wealth is to support the company's founding and initial operations. Sources of wealth in this case can include founder/owner capital, parent company funding, a business loan, or investor funding.
Source of funds is therefore asking how the relevant financial account will be funded, while source of wealth is asking how a company's wealth has been built overall.
How they connect to the rest of your application
Source of funds is linked to other onboarding questions such as the company's nature of business, purpose of account, and company age. Source of wealth is linked to other onboarding questions such as the company's stated net worth — for example, if the applicant states its net worth is more than $5m USD, what in turn explains how this wealth was accumulated?
An important caveat is that sometimes source of funds and source of wealth can be the same thing for certain company types, and especially for recently formed companies. The examples below help explain how different companies might appropriately respond to SOF and SOW questions.
Worked examples
Example 1: Small crypto exchange more than 5 years old
- SOF
- Revenues from ongoing business activities.
- SOW
- Accumulated profits and assets from business operations over the years.
- Why the responses are appropriate
- The business is more than 5 years old, so it makes sense it can fund the account with money earned from business activity. Given the company's age, it also makes sense that it has accumulated funds from business operations over the years.
Example 2: Payment service provider less than 2 years old
- SOF
- Revenues from ongoing business activities.
- SOW
- Capital contributions from the 100% parent company owner.
- Why the responses are appropriate
- Although the business is less than 2 years old, it can fund the account with money earned from business activity, as it has begun operations, has a live website and is generating revenues. Given its age, it makes more sense that SOW is derived from the parent company, as it has not been operating long enough to accumulate its own profits and assets.
Example 3: Proprietary trading company less than 6 months old with one owner
- SOF
- Funding from the sole owner/founder.
- SOW
- Funding from the sole owner/founder.
- Why the responses are appropriate
- The applicant is a solely owned proprietary trading company being initially funded by its sole owner. As a recently formed prop trading firm, this is also the source of funds — the company has no clients and will only trade on its own capital, which in turn is derived from the sole owner.
Source of funds and source of wealth are related but distinct concepts that serve different purposes in the onboarding process. Understanding the difference, and being able to articulate each one clearly and consistently with the rest of your application, is one of the most straightforward ways to avoid unnecessary delays when applying to banks, crypto exchanges, or other financial institutions.
Frequently asked questions
What is the difference between source of funds and source of wealth?
Source of funds (SOF) asks where the money used to fund a specific account currently comes from — for a business, typically ongoing business revenues or the company's own assets. Source of wealth (SOW) asks how the company has accumulated its wealth over time, such as retained profits and assets built up over years of operating, or, for a newly formed business, the initial source of wealth supporting its founding (founder/owner capital, parent company funding, a business loan or investor funding).
Why do banks and crypto exchanges ask for SOF and SOW?
SOF is requested for almost every onboarding application to a bank, crypto exchange or other financial institution. SOW may also be required depending on factors such as the applicant's risk score, jurisdiction, entity type, net worth or expected account usage. Together they help the institution understand and evidence the legitimacy of the money and wealth behind the account.
Can source of funds and source of wealth be the same thing?
Yes. For certain company types, and especially for recently formed companies, SOF and SOW can be the same. For example, a solely owned proprietary trading company only a few months old may be both funded and capitalised by its sole owner, so both the source of funds and source of wealth are the owner/founder.
Coming next
In our next article we will build on the above by looking at how SOF and SOW responses are validated through proof of source of funds (POSOF) and proof of source of wealth (POSOW), where applicable.
Preparing a financial institution application and unsure how to approach your source of funds or source of wealth responses, or had a previous application delayed on these points? Get in touch or see our services.