Regulators Score Wallets in Battle Against Crypto Crime

The Bank for International Settlements (BIS) has proposed a novel approach to anti-money laundering (AML) compliance for permissionless blockchain networks by introducing a risk-based scoring system for non-custodial crypto wallets. The initiative, outlined in a recent bulletin, aims to leverage the transparent nature of public ledgers to assess the risk associated with crypto transactions, particularly those involving illicit flows [1]. The system would assign scores based on the transaction history of wallet addresses, with the goal of preventing tainted tokens from entering traditional financial systems through off-ramps [2].

Under the proposed framework, wallet addresses receiving funds primarily from "allow list" wallets—those verified through know-your-customer (KYC) checks—would receive a maximum score of 100, while those linked to addresses on a "deny list"—identified as sources of illicit activity—would score closer to zero. The BIS emphasized that such a system could be embedded into wallets or tokens themselves, enabling compliance even for users transacting exclusively through non-custodial platforms [1]. The approach is seen as a pragmatic response to the limitations of existing AML standards, which struggle to enforce compliance in decentralized environments [2].

The BIS also noted potential economic consequences of the system, such as the possible fragmentation of stablecoins. Those linked to illicit flows could trade at a higher discount compared to those with clean transaction histories, according to the report. The proposal highlights the need for widespread and affordable compliance service providers, which would reduce the plausibility of users claiming to have received tainted tokens in good faith [2].

Blockchain industry experts have responded cautiously. Ari Redbord, global head of policy and government affairs at TRM Labs, warned that embedding compliance ratings into tokens or requiring KYC for non-custodial wallets could fundamentally alter how blockchain networks operate. He emphasized the need for transparency in compliance tools, advocating for what TRM refers to as “glassbox attribution,” allowing compliance teams to review the underlying wallet connections behind any score [2]. Redbord also noted that bad actors might circumvent the system by using mixers or unregulated platforms, raising concerns about privacy and the potential for a tiered classification of tokens [2].

The BIS acknowledged the challenges in implementing such a system but argued that it could help close regulatory gaps in the global financial system. According to data cited in the report, stablecoins accounted for 63% of illicit crypto transactions in 2024, underscoring the urgency for more effective oversight mechanisms [2]. The BIS suggested that embedding provenance into regulation could be a promising avenue for addressing these risks.

As the regulatory landscape for crypto assets continues to evolve, the BIS's proposal reflects a broader shift in how regulators are thinking about compliance in decentralized systems. The approach, while still in the conceptual stage, could influence future AML standards and shape the development of crypto infrastructure.

Source:

[1] BIS Proposes Grading Wallets for Permissionless Blockchain AML (https://www.ledgerinsights.com/bis-proposes-grading-wallets-for-permissionless-blockchain-aml/)

[2] BIS Floats AML Scores for Non-Custodial Crypto Wallets (https://thedefiant.io/news/regulation/bis-floats-aml-scores-for-non-custodial-crypto-wallets)