Key Takeaways
- BIS proposes an AML compliance scoring system to assess how likely a cryptoasset is linked to illicit activity, acting as a “final filter” before conversion into fiat currency.
- Stablecoins have overtaken Bitcoin as the most used cryptoasset for illicit transactions, accounting for 63% of such activity in 2024.
- The scoring system adapts to each blockchain, using different analysis methods for Bitcoin’s UTXO model and account-based stablecoins like those on Ethereum and Tron.
- BIS calls for global coordination and market-driven compliance tools to encourage responsible crypto use, even beyond the reach of formal regulation.
The Bank for International Settlements (BIS) has outlined a new framework to curb illicit crypto activity by leveraging the transparent nature of public blockchains, proposing an “AML compliance scoring system” that could become the final filter for converting crypto into fiat currency.
Tracing the Problem in a Decentralized World
In its latest bulletin, the BIS argues that traditional anti-money laundering (AML) methods, which rely on regulated intermediaries, are not as effective in the decentralized world of public blockchains like Bitcoin and Ethereum. Instead, the institution suggests using the visible trail of blockchain transactions to determine how “clean” a particular crypto asset might be.
“An AML compliance score based on the likelihood that a particular cryptoasset unit or balance is linked with illicit activity may be referenced at points of contact with the banking system (‘off-ramps’), preventing inflows of the proceeds of illicit activity and supporting a culture of ‘duty of care’ among crypto market participants,” the paper states.
Rise of Stablecoins in Illicit Uses
The proposal comes amid growing concern over Stablecoins’ role in financial crime.
According to the paper, stablecoins have overtaken Bitcoin as the asset of choice among criminals using crypto, making up approximately 63% of all illicit transactions in 2024.
The bulletin notes that Stablecoins circulate on programmable blockchains, such as Ethereum and Tron, which offer higher transaction speeds, lower fees, and added functionality.
Unlike Bitcoin’s UTXO model, Stablecoins use an account-based system, making individual tokens indistinguishable once pooled in a wallet.
However, their centralized issuance allows for some traceability, as transactions can often be traced back to the original minting, and issuers have the power to freeze balances when requested by authorities.
Scoring System to Evaluate Risk
Under the BIS’s proposed system, a score ranging from 0 (highly tainted) to 100 (clean) could be assigned based on a token’s transaction history and its exposure to known illicit addresses.
Authorities could then ask banks and crypto exchanges to block any attempts to cash out coins that fall below a certain risk threshold set by local rules.
Additionally, since Bitcoin and stablecoins differ in how transactions are recorded and tracked, the compliance scoring system adjusts according to each blockchain’s structure.
From Strict to Permissive Approaches
The BIS also suggests varying levels of compliance strictness, ranging from denying all tokens not verified through Know Your Customer (KYC) processes to more permissive frameworks that only block assets directly tied to known illicit sources.
Compliance Through Economic Pressure
The report highlights the importance of international coordination and the need to adapt smarter, more responsive regulations to address the unique nature of cryptoassets.
It also points to the potential for market-driven compliance tools and third-party scoring services to financially motivate users to favor clean assets and reduce the circulation of tokens linked to illicit activity.
According to the bulletin, integrating AML scores into the crypto space may promote more responsible behavior among users, even in parts of the system that lie beyond the reach of direct regulation.
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