Regulators and DeFi Grapple for Control Over Crosschain Futures

Regulatory frameworks are increasingly shaping the future of crosschain transactions in the cryptocurrency space. While crosschain technology was initially seen as a tool for enabling seamless and borderless crypto transactions, it has become evident that compliance with evolving anti-money laundering (AML) and financial regulations is now a critical factor for adoption and institutional participation. The challenges in implementing AML measures across decentralized systems highlight the growing tension between innovation in the decentralized finance (DeFi) sector and the need to align with global regulatory expectations.

A key issue in crosschain transactions is the lack of robust AML monitoring capabilities. Decentralized bridges—tools that facilitate the transfer of assets between different blockchain networks—are particularly problematic in this regard. Forensic reports have identified over $21.8 billion in illicitly laundered assets linked to these tools. The architecture of many bridges obscures wallet provenance, making it difficult to track transactions across networks. As a result, these systems have become a favored tool for hackers and money launderers, despite the growing pressure on centralized exchanges to implement crosschain surveillance.

Traditional AML tools are ill-suited for the decentralized nature of crosschain protocols. Most legacy compliance solutions were designed for centralized exchanges and custodians with clear know-your-customer (KYC) endpoints, not for decentralized platforms where counterparty identification is often absent. While AI-powered analytics and smart contract plugins offer some real-time monitoring capabilities, they still rely on centralized data collection standards like IVMS 101, which assume the presence of regulated intermediaries at every step. This creates a compliance gap in crosschain transactions, as these solutions do not align with the permissionless nature of decentralized systems.

The implementation of the Travel Rule further complicates crosschain compliance. This regulation requires crypto service providers to include originator and beneficiary details in transfers exceeding certain thresholds. However, decentralized bridges and decentralized exchanges (DEXs) often lack the infrastructure to surface this information, making compliance difficult. In Europe, the Markets in Crypto-Assets (MiCA) regulations are introducing uniform standards for virtual asset service providers (VASPs) and registered platforms, but they fall short of addressing the broader challenges of crosschain compliance. Meanwhile, in the U.S., recent enforcement actions by the Office of Foreign Assets Control (OFAC) have emphasized strict adherence to AML rules, with digital banks facing potential fines exceeding $200 million for non-compliance.

The UK has also taken steps to expand its AML oversight beyond registration, making compliance requirements more stringent for DeFi platforms. However, the fragmented nature of global AML regulations poses significant challenges for crosschain transactions, which often span multiple jurisdictions. There is a growing recognition that AML tooling must be adapted to work with decentralized systems if DeFi is to achieve mainstream adoption. Startups that integrate compliance services into protocol design may gain a competitive edge as regulatory requirements tighten.

Institutional adoption of crosschain systems is likely to remain limited until bridges and other decentralized tools are equipped with compliance infrastructure that meets international standards. While some projects are already integrating AML tooling, the industry still lacks solutions that preserve the decentralization ethos of DeFi while ensuring regulatory compliance. Until such infrastructure emerges, DeFi platforms will struggle to attract institutional capital, which is hesitant to engage with systems that pose regulatory risks.