Anti-money-laundering frameworks require that identifying information accompany a transfer between institutions. Extending that obligation to crypto raised a question with no obvious technical answer.
The rule was designed for correspondent banking
In the traditional version, a payment message carries sender and recipient details alongside the money, travelling through the same messaging network.
Every participant is a licensed institution with a known identity, so there is always a counterparty to receive the information and be accountable for it.
The design assumes a closed network of identified members, each supervised somewhere and each able to be asked questions later. A public blockchain is precisely the opposite arrangement.
Blockchains carry value without identity
A transaction moves an amount between addresses. There is no field for a name, and nothing forces the receiving side to be an institution at all.
So the required information cannot travel with the transfer. It must move through a separate channel that the two institutions establish between themselves.
Building that channel across thousands of exchanges in different jurisdictions is the practical difficulty, and several competing messaging systems emerged in response.
Counterparty discovery is unsolved
Before sending information, an institution must work out which institution controls the destination address, and addresses do not announce their owner.
Firms rely on analytics attributing addresses to services, on directories of participating institutions, and on asking the customer where funds are going.
Each method is imperfect, and a mistaken identification means either sending customer data to the wrong party or failing an obligation. Both are compliance failures with different consequences.
Analytics attribution also lags reality, since services rotate addresses and new ones remain unlabelled until enough activity accumulates to classify them.
Self-hosted wallets fall outside the framework
When a customer withdraws to a wallet they control themselves, there is no receiving institution to send information to.
Jurisdictions have answered differently, some requiring proof that the customer controls the destination address, others treating such withdrawals as ordinary.
Proof of control usually means signing a message from the address, which is straightforward for technical users and a barrier for everyone else.
Thresholds and scope vary widely
The value above which the obligation applies differs between jurisdictions, as does whether smaller transfers require reduced information or none.
Firms operating internationally generally apply the strictest standard they face rather than maintaining separate processes per market.
The result is a compliance layer that sits alongside the chain rather than on it, and its details continue to shift as jurisdictions revise their rules.