BIS Proposes 'Compliance Scores' for Crypto Users

BIS Wants Crypto Exchanges to Assess Token History for Compliance

The Bank for International Settlements (BIS) is proposing a novel approach to anti-money laundering (AML) in the crypto space: assigning "compliance scores" to crypto holdings based on their transaction history. This proposal aims to address the challenges of enforcing AML regulations on permissionless blockchains.

The Problem with Permissionless Blockchains

Blockchains, by design, allow anyone with an internet connection to transact without requiring sign-up or identification. While this promotes financial inclusion and levels the playing field, it also raises concerns among lawmakers regarding money laundering and illicit activities.

The BIS Solution: AML Compliance Scores

The BIS researchers suggest scoring individuals' crypto based on past transactions. Crypto passing through wallets associated with criminal activity or money laundering protocols would receive lower scores. Individual countries could then set minimum score thresholds required for converting crypto into fiat currency via exchanges.

This approach leverages the transparency of blockchains to identify potentially tainted tokens, aiming to strike a balance between regulatory compliance and the core principles of decentralization.

How it Would Work

When a user tries to cash out crypto at an exchange, the exchange would analyze the token's transaction history. Depending on the level of compliance required by the country, the exchange could:

• Strict Compliance: Only accept tokens from wallets that have passed KYC checks (allow list).
• Permissive Compliance: Check if the token has passed through wallets known for illicit activity (deny list).

Tokens failing to meet the required score would be rejected for conversion.

Potential Implications

This system could create a tiered market where "clean" tokens trade at a premium compared to those with a questionable history. It could also incentivize the development of compliance services to help users demonstrate the legitimacy of their holdings.

Key Takeaways

• BIS proposes assigning AML compliance scores to crypto tokens.
• Exchanges could be required to block withdrawals of low-scoring tokens.
• The goal is to combat money laundering without compromising blockchain's permissionless nature.