Why has the traditional regulatory system become a joke on the blockchain?

Written by: A Spinach of Web3

Recently, Spinach read a briefing paper published by the Bank for International Settlements (BIS) — "Anti-Money Laundering Compliance Framework for Crypto Assets" [1]. As the central bank of central banks, every report from the BIS becomes a barometer for financial regulation in various countries. So when I saw the title, my first reaction was: finally, someone has come up with a clever way to regulate cryptocurrencies?

However, after reading the full text, I realized that this paper is not a usable solution; it seems more like a dignified surrender.

In academic language, the BIS subtly acknowledges a harsh reality: the KYC/AML system of traditional finance has completely failed in the decentralized crypto world.

What is the "innovative" solution they propose?

Scoring wallets, encouraging users to check each other's compliance, and conducting final checks at the points of deposit and withdrawal.

This is like a martial arts master, who has practiced the Dragon Subduing Eighteen Palms for a lifetime, suddenly discovering that the opponent is coming in a tank, and then suggesting everyone put up a sign at the city gate: "Tanks prohibited."

Not to mention the high implementation and coordination costs of scoring, even if it is implemented, what if someone deposits a few toxins into a high-scoring wallet account?

Encouraging users to check themselves is like asking you to verify whether a dollar bill has ever been used to buy drugs before accepting it. Theoretically feasible, but absurd in practice.

Conducting KYC/AML at the deposit and withdrawal stages may be the last dignity left for these traditional institutions; at least you can verify identity and source of funds.

Why do I say that the traditional regulatory system has almost completely failed on-chain? This brings us to a ridiculous regulatory rule that regulatory agencies around the world continue to enforce — the Travel Rule.

Travel Rule: A Farce from Traditional Finance to the Crypto World

To understand the absurdity of the Travel Rule, we must first look at its history.

In 1996, when the internet was still dial-up, the Financial Crimes Enforcement Network (FinCEN) in the United States first introduced the Travel Rule as part of the Bank Secrecy Act. The requirement at that time was simple: banks must pass the remitter's information to the next financial institution when processing wire transfers over $3,000.

This worked well in the traditional banking system. Why?

Because banks are centralized, with complete customer information and standardized information transmission systems like SWIFT. Industrial and Commercial Bank of China knows everything about Zhang San, and China Construction Bank knows everything about Li Si; exchanging information during transfers is seamless.

But in 2019, the Financial Action Task Force (FATF) made a game-changing decision: to extend the Travel Rule to cryptocurrencies.

What is the FATF? An intergovernmental organization established in 1989, initially aimed at combating drug money laundering. Its "40 Recommendations" are regarded as the global gold standard for anti-money laundering. When the FATF speaks, regulatory agencies worldwide must listen.

On June 21, 2019, the FATF passed an interpretative note on Recommendation 15 in Orlando, extending the original Recommendation 16 (Travel Rule) applicable to traditional financial institutions' wire transfers to the virtual asset domain. It requires virtual asset service providers (VASPs) to collect and transmit the identity information of both the sender and receiver when processing transactions exceeding $1,000/€1,000, including:

Name
Account number (wallet address)
Geographic location or ID number
More detailed information if necessary

Their logic is: since the Travel Rule has operated in traditional finance for over 20 years, it should work in the crypto world as well.

The problem with this logic is that they completely misunderstand how blockchain works.

The Global Chaos of the Travel Rule

Let’s look at the current implementation status of the Travel Rule. According to the FATF's report in June 2025, 99 jurisdictions claim to have passed or are in the process of passing Travel Rule legislation. Sounds impressive, right?

But the devil is in the details. 75% of jurisdictions are still only partially compliant or non-compliant [2], a figure that is exactly the same as in April 2023 — 75% of 73 countries, zero progress.

Why is this the case? Because each country is doing its own thing.

The United States has maintained the old rule from 1996: a $3,000 threshold. But the FATF recommends $1,000, leading to the first split.

Singapore was one of the first countries to respond, starting implementation on January 28, 2020, with a threshold of 1,500 Singapore dollars. South Korea implemented it on March 25, 2022, with a threshold of 1 million won (about $821). Japan stated that all transactions, regardless of amount, must comply.

The EU is even more extreme, delaying the implementation of the Transfer of Funds Regulation (TFR) until December 30, 2024, and then stating: we have no threshold; even 1 cent must comply with the Travel Rule.

What is the result? A $1,500 transfer from the U.S. to the EU, with the U.S. saying it doesn't need to comply with the Travel Rule, while the EU insists it must. Both sides are "compliant," but the transaction gets stuck.

This is not even the most chaotic situation. Israel implemented the Travel Rule in 2021 with no threshold, but almost no other country is connected with it. Canada also has no threshold, but its rules are incompatible with those of other countries.

What is the result of this piecemeal approach?

According to Notabene's 2024 industry survey [3], despite some improvement from the previous year (from 52% to 29%), 29% of VASPs continue to send Travel Rule information indiscriminately to all counterparties without conducting any due diligence assessments.

This "broad net" approach actually reflects an awkward reality: most VASPs are just going through the motions because they cannot verify whether the counterparties are actually using this information or are compliant.

DeFi: The Blind Spot of the Travel Rule

While regulators are still entangled in the Travel Rule for centralized exchanges, DeFi has completely bypassed this issue.

The premise of the Travel Rule is the existence of VASPs (intermediaries) to enforce it.

If I use MetaMask to swap tokens directly on Uniswap, I ask:

Is MetaMask a VASP? It’s just a browser plugin.
Is Uniswap a VASP? It’s just a piece of code.
Are Ethereum miners VASPs? They are just validating transactions.

When both parties trade directly peer-to-peer, there is no intermediary to enforce the Travel Rule.

This is as absurd as asking air to enforce the law.

Who is required to enforce the Travel Rule? Is it asking the code to provide KYC information?

The FATF's response is: developers of DeFi protocols should be considered VASPs.

The absurdity of this logic is akin to saying that the inventors of the TCP/IP protocol should be held responsible for all internet crimes. Vitalik Buterin created Ethereum, so should he be responsible for all illegal transactions on Ethereum? If Satoshi Nakamoto were still alive, would he be sentenced to life imprisonment?

Criminals' Response: The Art of Smurfing

How do real criminals view the Travel Rule? Probably as a comedy.

Criminals use traditional smurfing tactics to evade the Travel Rule [4], breaking large transactions into smaller ones. Want to transfer $18,000? Split it into 20 transactions of $900, sent from different wallets at different times. Each transaction is below the threshold, so the Travel Rule doesn’t apply.

North Korean hackers stole $1.46 billion from ByBit this year — the largest cryptocurrency theft in history. Did they use the Travel Rule? Of course not.

In 2024, the amount of cryptocurrency used for illegal activities reached tens of billions of dollars. None of these criminals were caught by the Travel Rule.

Another consequence of the Travel Rule is that it exacerbates regulatory arbitrage; every time regulation tightens, it’s like squeezing toothpaste — you squeeze it here, and it pops out there.

Compliance Costs: An Expensive Performance

The Travel Rule does not bring solutions but astronomical compliance bills.

According to estimates, the costs for a medium-sized exchange to implement the Travel Rule include:

Technical solution procurement: annual fee of $100,000 to $500,000
System integration overhaul: one-time cost of $500,000 to $2 million (requires overhauling the entire trading system)
Compliance team expansion: annual salary cost of $200,000 to $1 million (requires a dedicated Travel Rule compliance officer)
Legal consulting fees: annual fee of $100,000 to $500,000 (different rules in different countries require local legal support)
Auditing and reporting: annual fee of $50,000 to $200,000

This is just the visible cost; what about the invisible ones?

These high compliance costs are accelerating market concentration; the giants naturally support the Travel Rule — they can afford the compliance costs, while their competitors cannot. This is not regulation; it’s market cleansing through regulatory costs.

What is the biggest hidden cost? The death of innovation.

A startup team’s first consideration is not technological innovation, but:

Does this comply with the Travel Rule?
Can we afford the compliance costs?
What if we are deemed a VASP?

The result is that innovation either shifts to more lenient regulatory environments or is simply abandoned. We are stifling 21st-century innovation with 19th-century thinking.

This is the truth about the Travel Rule: a huge investment has been made to establish a useless system that, apart from increasing costs, reducing efficiency, and stifling innovation, has solved nothing. Meanwhile, ordinary users have to pay for this regulatory farce — endless forms, interminable reviews, and unending fees.

Participants in the Regulatory Theater

Current crypto regulation is a carefully choreographed drama, with everyone having their own script:

Regulatory agencies: "Look, we are enforcing the Travel Rule! We are protecting investors!" (Actually knowing it’s useless, but needing political achievements)

Large institutions: "We are fully compliant!" (In reality, just going through the motions, asking you, "Is this your wallet?")

Small institutions: "We are working hard to comply!" (Actually thinking about how to move to a more lenient regulatory environment)

Users: "I comply with the Travel Rule!" (Actually have learned how to bypass it)

Criminals: "Travel what Rule?" (Continuing to do what they do)

Recognizing Reality, but Not Giving Up Thinking

At this point, you might ask: what should we do?

First, it’s important to clarify: this article is not criticizing regulation itself, but pointing out the current situation. The original intention of regulation is good — to prevent money laundering, protect investors, and maintain financial stability. These goals are unassailable and indeed necessary.

What we criticize is using the wrong tools to achieve the right goals, like trying to screw in a screw with a hammer — the tool is wrong, and no amount of effort will help.

We need to acknowledge a fact: in a decentralized world, traditional regulatory tools have failed. This is not a technical issue, but a paradigm issue. Just as you cannot manage a car using horse-drawn carriage methods, you cannot manage DeFi using banking management methods.

But this does not mean abandoning all regulatory efforts. On the contrary, we need a new way of thinking. Good regulation should be like traffic rules — not to prevent people from driving, but to make the roads safer.

Perhaps what we need is not a globally unified standard, but healthy competition among different jurisdictions. Regulatory innovation and technological innovation should run parallel, not in opposition.

This requires strong on-chain data analysis capabilities. Companies like Chainalysis have already proven that suspicious transactions can be effectively identified through behavioral analysis without needing to know everyone's ID number. In a future where the regulatory framework becomes clearer, compliance infrastructure will become a key foundation of the crypto industry.

What we should advocate for is not anarchy, but smarter governance. Regulators and practitioners should sit down for sincere dialogue, understand each other's concerns, and jointly explore regulatory paths suitable for the characteristics of new technologies.

After all, the real enemy is not regulation, nor is it cryptocurrency, but those who exploit technological loopholes to commit crimes. In this regard, the goals of regulators and practitioners are aligned.

Final Thoughts

Returning to the BIS report mentioned at the beginning.

On the surface, it proposes solutions. In reality, it records the end of an era — the jurisdiction of traditional financial order over crypto assets is irreversibly waning.

This is the state of crypto regulation in 2025: an expensive game that all participants know is a joke, yet everyone has to continue performing.

The Travel Rule, from the banking wire transfer rules of 1996 to its forced transplantation into the crypto world in 2019, is itself a manifestation of regulatory inertia — using old bottles to hold new wine, managing highways with traffic rules from the era of horse-drawn carriages.

As Hayek said, "The road to hell is paved with good intentions." Today's crypto regulation may be such a road. The original intention is good — to prevent money laundering, protect investors, and maintain financial stability. But the result of its execution has been to increase friction, hinder innovation, and push activities underground.

Pandora's box has been opened, and the decentralized genie will not return to the bottle.

Rather than continuing this doomed war, it is better to think about how to find balance in the new world. What is needed is not stricter rules, but entirely new wisdom.

And this wisdom will clearly not come from those regulatory agencies still managing 21st-century technology with 20th-century thinking.

The future is not a place we are going to; it is a place we are creating.

I just hope that when history looks back on this era, it will not record it as: humanity once had the opportunity to establish a more open, transparent, and efficient financial system, but ultimately it was messed up by a group of bureaucrats who did not understand technology.

That would be a greater joke than any regulatory failure.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。