<\/p>\n
The Bank for International Settlements outlined a way to embed anti\u2013money laundering checks into tokens, even for wallets outside exchanges.<\/p>\n
The Bank for International Settlements (BIS) published<\/a> a bulletin on Aug. 13 suggesting that anti-money laundering (AML) checks could be extended to non-custodial crypto wallets<\/a> using their past transaction history, a concept that blockchain analysts warn could represent a \u201csignificant shift in how blockchain networks operate.\u201d<\/p>\n The report, titled \u201cAn approach to anti-money laundering compliance for cryptoassets,\u201d claims that current standards \u201chave limited effectiveness with decentralised record-keeping in permissionless public blockchains.\u201d<\/p>\n According to the BIS, the full transaction history available on public ledgers could potentially be used to determine whether tokens are \u201ctainted\u201d and block or penalize their conversion into fiat currency at off-ramps.<\/p>\n The central banks\u2019 coordination body wrote that \u201cusers could reasonably be expected to exercise a duty of care in transacting with crypto tokens by checking beforehand if a crypto coin is known to be compromised,\u201d adding that failure to comply could result in fines.<\/p>\n \u201cWhile some users may reasonably claim to have received a tainted token in good faith if information on illicit use is scarce, such an argument would be less persuasive if there were widespread and affordable compliance service providers,\u201d BIS explained.<\/p>\n The bulletin even acknowledged that such a system could fragment stablecoins<\/a>, noting that those linked to illicit flows \u201ccould trade at a higher discount relative to others with no such history.\u201d<\/p>\n The proposal includes mechanisms ranging from \u201callow lists\u201d of wallets that have passed KYC checks to \u201cdeny lists\u201d flagging addresses tied to criminal activity. The BIS claims the scoring could be embedded into wallets or tokens themselves. Hence, the system could even be extended to users who transact solely through non-custodial wallets.<\/p>\n Ari Redbord, global head of policy and government affairs at blockchain forensics firm TRM Labs, said in commentary to The Defiant that while blockchain analytics can already identify exposure<\/a> to illicit wallets, the key is \u201censuring that any such score does not become a black box.\u201d<\/p>\n He argued for what TRM calls \u201cglassbox attribution,\u201d where compliance teams can see the wallet connections behind any score and make their own judgments.<\/p>\n Redbord added that embedding compliance ratings into tokens or requiring KYC for non-custodial wallets \u201ccould represent a significant shift in how blockchain networks operate\u201d and may create \u201ctiered assets, where the same token is treated differently based on its transaction history.\u201d<\/p>\nRisk of Fragmentation<\/h2>\n