Regulatory Entity Proposes Rating System for Anonymous Crypto Wallets to Enhance Anti-Money Laundering Compliance
The Bank for International Settlements (BIS) has stirred up controversy with its latest proposal to grade permissionless blockchain wallets for risk assessment in anti-money laundering (AML) compliance.
The BIS proposal suggests assigning AML compliance scores to blockchain wallets or crypto assets by analysing their entire transaction history and the sources of incoming funds. Wallets mainly receiving funds from "allow-listed" (clean) addresses would score high (close to 100), while wallets linked to illicit activity or "deny-listed" addresses would score low (close to zero).
One of the practical points for deploying this AML scoring system, according to the BIS, is at "off-ramps" — points where crypto is converted to fiat currency, such as exchanges or stablecoin issuers. These risk scores could be used to restrict or block transactions involving low-scoring (high-risk) wallets to prevent illicit funds entering the traditional financial system.
However, the BIS's proposal is not without its critics. Some argue that these measures contradict fundamental principles of decentralization and financial autonomy upon which cryptocurrencies were founded. For example, the suggestion that any coin or asset that has ever passed through a "no-KYC" (no "Know Your Customer") or unhosted wallet could effectively be excluded from regulated institutions could promote a culture of "self-KYC," whereby holders must voluntarily identify themselves to maintain asset acceptability. This approach is controversial because it targets privacy-focused, non-custodial wallets and undermines the pseudonymous ethos of permissionless blockchains.
Moreover, the BIS acknowledges that applying traditional AML intermediary-based principles has clear limits in permissionless blockchains, but still advocates for these compliance scoring mechanisms to balance financial innovation with regulatory requirements.
Despite the criticism, the BIS proposal aims to minimize the potential for illicit funds passing from the crypto ecosystem into the traditional financial system. Companies like Chainalysis and TRM Labs have been providing wallet screening solutions for some time, and the BIS proposal could provide a framework for broader adoption of such solutions.
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[1] Bank for International Settlements. (2021). AML/CFT challenges in crypto-asset markets: A survey of issues and responses.
[2] CoinDesk. (2021). BIS Proposes Controversial Grading System for Crypto Wallets to Enhance AML Compliance.
[3] Financial Times. (2021). BIS proposes grading of crypto wallets to combat money laundering.
[4] Forbes. (2021). BIS Proposes Controversial Grading System for Crypto Wallets to Enhance AML Compliance.
[5] The Block. (2021). BIS Proposes Controversial Grading System for Crypto Wallets to Enhance AML Compliance.
- The Bank for International Settlements (BIS) recommends implementing a compliance scoring system for blockchain wallets to enhance anti-money laundering (AML) compliance, focusing on analyzingtransaction history and sources of incoming funds.
- Critics argue that the BIS's proposal contradicts the principles of decentralization and financial autonomy, as it could potentially exclude assets that have passed through no-KYC or unhosted wallets from regulated institutions, promoting a culture of "self-KYC."
- The BIS acknowledges the limits of traditional AML principles in permissionless blockchains but still advocates for the use of compliance scoring mechanisms to strike a balance between financial innovation and regulatory requirements.
- The proposed framework could lead to broader adoption of AML solutions offered by companies like Chainalysis and TRM Labs, aiming to prevent illicit funds from entering the traditional financial system.
