The Bank for International Settlements (BIS) has introduced a transformative crypto compliance plan designed to enhance anti-money laundering (AML) protocols in the cryptocurrency sector. By assigning a provenance-based risk score to crypto-to-fiat transactions, the BIS aims to make it more challenging to convert ‘dirty’ crypto into government-issued currency.
Understanding the BIS Plan for Crypto Compliance
In a recent bulletin, the BIS proposed an innovative approach to AML compliance for crypto assets. This involves assigning a compliance score to each crypto holding before it is exchanged for fiat currency. The score is based on the probability that a specific cryptoasset is linked to illicit activity. This system aims to prevent the inflow of illicit funds and promote a “duty of care” among crypto market participants.
The BIS highlighted that current AML methods, which rely heavily on trusted intermediaries, have shown limited effectiveness in the crypto environment. However, it noted the potential of public blockchain transaction histories as valuable tools for compliance monitoring.
Stablecoins: The Preferred Asset for Illicit Crypto Flows
The BIS has identified stablecoins as the preferred asset among criminals using crypto, surpassing Bitcoin (BTC) since 2022. Reports from crypto forensics firms like Chainalysis and TRM Labs indicate that by 2024, stablecoins accounted for approximately 63% of all illicit transactions. To combat this, the BIS suggests using AML compliance scores that reference Bitcoin unspent transaction outputs (UTXOs) or wallets for stablecoins, establishing risk thresholds to manage off-ramp requests.
How the BIS Plan Affects Crypto Off-Ramps
The BIS proposal places a responsibility on crypto off-ramps to adhere to this compliance system. Entities involved in crypto exchanges would be incentivized to avoid accepting or disbursing tainted coins, as non-compliance could result in fines or other penalties. The plan also introduces potential compliance requirements for individual holders. Although some users may acquire tainted assets unknowingly, widespread and affordable compliance services could diminish such defenses.
Potential Market Implications of the BIS Plan
The BIS predicts that tainted stablecoins could trade at a discount under this compliance system. Risk scores may follow tokens throughout the blockchain, embedding themselves into the UTXO or wallet. This could impose a duty of care on users, influencing behavior in decentralized transactions.
By implementing these measures, the BIS aims to strengthen the integrity of the crypto market, ensuring that only compliant and clean assets circulate within the financial system.
