The Bank for International Settlements (#BIS ) has proposed a new risk assessment system for cryptocurrency assets that may significantly complicate the cashing out of 'dirty' digital money. Financial institutions will need to assign an anti-money laundering compliance rating (#aml ) to each cryptocurrency transaction before exchanging it for fiat currencies.
Asset Origin-Based Risk Assessment System
BIS describes an approach to AML compliance for crypto assets, where each unit of cryptocurrency is assigned a compliance rating before being exchanged for fiat currency. 'The AML compliance rating, based on the likelihood that a specific unit of crypto asset or balance is associated with illegal activity, can be used at contact points with the banking system,' the document states.
This assessment will be used to prevent the inflow of illegal funds and encourage 'due diligence' among participants in the cryptocurrency market. BIS notes that existing approaches to combating money laundering, which rely on trusted intermediaries, have 'limited effectiveness' in the context of cryptocurrencies.
Transaction histories in public blockchains may provide valuable tools for monitoring compliance, the organization believes. Cryptocurrency platforms for withdrawals will be responsible for adhering to such a system.
Stablecoins are the primary tool for illegal operations
According to BIS, since 2022, stablecoins have overtaken Bitcoin as the 'asset of choice among criminals using cryptocurrencies.' The document references reports from cryptocurrency analysis firms Chainalysis and TRM Labs, showing that by 2024 stablecoins accounted for approximately 63% of all illegal transactions.
BIS's AML compliance ratings will refer to unspent transaction outputs of Bitcoin (UTXO) or wallets in the case of stablecoins. Risk threshold values will be established to determine whether to allow or reject withdrawal requests.
The proposal notes that 'placing the obligation to exercise due diligence on these organizations will encourage them to avoid accepting or paying out tainted coins, as non-compliance may lead to fines or other sanctions.'
Impact on user behavior
The proposal also indicates that individual owners may fall under regulatory requirements. BIS states that although users may have acquired tainted assets in good faith, if compliance information was scarce, 'such an argument would be less convincing if there were widely available and accessible compliance service providers.'
BIS predicts that in such a system, tainted stablecoins may trade at a discount. Risk assessments may also 'accompany the token as it moves within an open blockchain—embedding the assessment in the UTXO or wallet itself.'
According to BIS, this will place the responsibility to exercise due diligence on users, potentially influencing behavior in fully decentralized transactions. The system will create an additional level of control over the movement of cryptocurrency funds, which may change market participants' approaches to asset and platform selection.
New regulations may significantly impact the liquidity of certain cryptocurrency assets and create additional barriers for users whose funds become linked to suspicious activity. Implementing such a system will require close cooperation between regulators, exchanges, and analytics service providers.
