BIS Wants to Embed AML Rules Directly into Crypto Assets

The Bank for International Settlements (BIS) has introduced a novel approach to anti-money laundering (AML) compliance in the cryptocurrency sector, proposing a risk-based scoring system for crypto-to-fiat off-ramps. This initiative, outlined in a recent BIS Bulletin, aims to mitigate the use of cryptocurrencies for illicit activities by embedding AML compliance into the assets themselves, rather than relying on intermediary entities [1]. The system would assign a compliance score to crypto holdings based on the likelihood of these assets being linked to criminal activity before they are converted to fiat currency [2].

A key component of the BIS proposal is the use of blockchain transaction data to assess risk. The report highlights that current AML strategies, particularly those relying on trusted intermediaries such as stablecoin issuers, have limited effectiveness in the decentralized context of crypto. Instead, the BIS suggests leveraging public blockchain records to monitor and score risk, which could significantly enhance transparency and traceability [1]. This approach would help prevent illicit inflows by embedding compliance directly into the asset, rather than depending solely on exchanges or wallet providers to screen users [2].

Stablecoins have emerged as the primary vehicle for illicit transactions in the crypto space, according to the BIS. Since 2022, stablecoins have overtaken Bitcoin as the preferred asset for criminal actors, accounting for approximately 63% of all illicit transactions as of 2024, according to reports from Chainalysis and TRM Labs [1]. The BIS notes that these assets, due to their stable value and widespread adoption, are particularly attractive for money laundering and illicit finance. In response, the proposed system would apply risk thresholds to off-ramp requests based on the compliance scores of the assets involved [1].

Under the framework, crypto off-ramps—entities that convert digital assets into fiat—would be held accountable for adhering to the compliance scoring system. The BIS recommends that these entities be subject to penalties if they fail to comply, thereby incentivizing them to avoid facilitating transactions involving "tainted" assets [1]. Furthermore, the report suggests that such a system could lead to a devaluation of illicitly obtained stablecoins, as their perceived risk might drive down their market value [1]. The scores would also be embedded into the blockchain itself—either in the unspent transaction outputs (UTXOs) or wallets—ensuring visibility across permissionless networks [1].

The BIS also emphasizes that individual users may be subject to compliance obligations in this model. While users might have initially received tainted assets without knowledge of their origins, the availability of widespread and affordable compliance services could diminish such arguments. The institution argues that this system would foster a "duty of care" among all participants, including users in decentralized transactions [1]. This shift could fundamentally alter behavior in the crypto space, moving compliance from the periphery to a core operational function [1].

The proposal aligns with broader regulatory efforts to standardize AML practices across the crypto industry. By embedding compliance into the asset rather than the exchange or user, the BIS seeks to close gaps in existing systems that allow bad actors to exploit inconsistent standards. If implemented, this framework could serve as a foundational element of global financial oversight in the digital asset space [2].

Source:

[1] New BIS plan could make 'dirty' crypto harder to cash out (https://cointelegraph.com/news/bis-crypto-compliance-scores-aml-offramps)

[2] Freezing Stablecoins for AML Not Practical, BIS Warns (https://www.ccn.com/news/technology/freezing-stablecoins-unrealistic-for-large-scale-aml/)