Permissionless networks do not conflict with financial integrity.

Written by: Rebecca Rettig, Chief Operating Officer and Chief Legal Officer of Jito Labs

Translated by: Chopper, Foresight News

Many financial institutions are leveraging one of the most innovative advancements in blockchain technology: permissionless networks.

Franklin Templeton has kept the official ledger of its on-chain U.S. government money fund shares on a permissionless blockchain since 2021, and accessed the Solana network in February 2025. BlackRock began issuing shares of its tokenized money market fund on Ethereum starting in March 2024. In January 2025, Apollo expanded tokenized access to its diversified credit fund to six permissionless networks. Announcements regarding traditional financial institutions deploying products on permissionless networks have been made almost weekly.

However, some traditional financial institutions still view permissionless networks as unfeasible. On the contrary, many banks, brokerage firms, and asset management companies are gravitating towards permissioned networks—systems where a gatekeeper or consortium decides who can validate transactions, who can use or participate in the network, and for what purposes. These institutions currently opt for permissioned networks because they mistakenly believe they must do so. The fundamental premise of this choice is the belief that a group of known and verified participants is a prerequisite for compliance with financial integrity laws such as the Bank Secrecy Act (BSA) and its anti-money laundering (AML) and counter-terrorism financing (CFT) requirements, as well as U.S. sanctions laws.

In short, compliance departments of institutions deem that permissionless networks are incompatible with the BSA and sanctions laws.

Our new paper titled "Compatibility of Permissionless Networks and Financial Integrity: A Practical Guide for Financial Institutions" (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7343938) elucidates that financial institutions can build and transact on permissionless blockchain networks. Concerns regarding financial integrity laws should not impede this usage, and these issues can be addressed under existing laws today. Institutions can fulfill their obligations through appropriate, risk-based compliance frameworks, putting controls at the operational level of the institution.

Financial institutions need not have any prerequisites—whether regulatory or otherwise—to own, review, or control the underlying infrastructure relied upon for their financial transactions and related information transmission. In fact, regulators have clearly recognized that financial institutions can adapt their financial integrity compliance programs to accommodate innovations like permissionless networks.

Requirements of Financial Integrity Laws

The BSA and sanctions laws require financial institutions to have reasonable controls over risks and to implement controls to mitigate such risks. They do not require the complete elimination of risk, which is an unattainable threshold.

Under the BSA, financial institutions' AML/CTF programs must focus on detecting, recording, and deterring illegal financial activities. These programs are not designed to prevent money laundering or terrorism financing comprehensively, nor can they. Federal bank regulators and FinCEN have made it clear that the key to financial integrity is a "reasonably designed" AML program that includes "effective processes for identifying, measuring, monitoring, and controlling risks."

FinCEN articulated this more bluntly in its August 2020 enforcement statement, describing its approach to BSA enforcement as not a "gotcha" game. The Treasury's report on de-risking directly addressed this potential concern, noting that while banks believe that any failure in bank controls would expose them to large fines, regulators pointed out that such fines are rare and typically occur after an entire AML/CTF program collapses, rather than from limited deficiencies that may arise from a risk-based approach.

The sanctions regime follows a similar logic. OFAC's compliance commitment framework outlines five fundamental components of an effective risk-based sanctions compliance program: management commitment, risk assessment, internal controls, testing and auditing, and training.

OFAC adjusts its expectations regarding implementation based on the size, products, clients, and geographic scope of the institution.

The Economic Sanctions Enforcement Guidelines weigh factors such as intent, knowledge of the conduct, harm to the sanctioned targets, and the sufficiency of compliance programs when institutions decide how to handle apparent violations.

Each institution's enforcement system and history support a "risk-balanced, not zero-tolerance" approach. FinCEN and OFAC focus their enforcement on reasonably detectable systemic flaws rather than isolated mistakes. This position is directly related to institutions' concerns about unintentional violations posed by permissionless networks.

AML/CFT and sanctions mechanisms require controls commensurate with identified risks, and financial institutions can achieve this on permissionless networks. Any minor or unintentional violations of these mechanisms should not pose risks to financial institutions.

Unintentional, Indirect Interactions Do Not Constitute Sanctions Violations

Financial institutions should view their use of permissionless networks as akin to the use of infrastructure, similar to how they treat the public internet and telephone networks. Both systems are shared, and the participants do not know or vet other users and operators. Therefore, they should adjust their compliance strategies accordingly.

On the other hand, financial institutions' reluctance to engage in permissionless networks primarily stems from concerns about unintentionally or unknowingly interacting with sanctioned or illegal actors—for instance, paying network fees to validators operating on behalf of sanctioned actors, conducting transactions with sanctioned actors unknowingly, or receiving or trading crypto assets that may have touched illegal actors at some point in their histories.

However, unintentional, unaware interactions with validators or other network participants in sanctioned jurisdictions are not the types of activities that sanctions laws aim to address. This concern is broader than geographical scope because validators can be designated persons anywhere: the institution did not choose, contract with, export products to, fund, or otherwise transact with them, and fees are rendered under the same rules applicable to all users of the network.

Regulators have confirmed this. For instance, in November 2025, the OCC addressed this concern by issuing Interpretive Letter 1186, confirming that banks can pay network fees on blockchain networks and can hold the crypto assets required to pay those fees as principal. This letter reasoned based on Interpretive Letter 1174 from January 2021, wherein the OCC concluded that banks can verify, store, and record payment transactions by acting as nodes. Accepting fees paid to nodes is an inevitable outcome of that conclusion. The letter uses Ethereum, a permissionless network where validators are selected in a pseudo-random manner, as an example. This series of letters does not distinguish between permissioned and permissionless networks.

When institutions submit transactions via a permissionless network, the protocol assigns the proposal rights for the block containing the transaction to a unique validator, typically assigned in a pseudo-random manner and proportionate to the validator's stake. Fees set by the rules defined by the protocol depend on network demand and the computation resources consumed by the transaction. Therefore, institutions cannot choose the validators processing their transactions, negotiate fees, or ascertain the identities of validators before or after transactions. All other users on the network follow the same rules for transactions.

As mentioned, this is somewhat similar to the relationship between an email sender and the owner of the routers carrying the messages, or between a caller and the owner of the switch completing the call. An Internet Protocol data packet from a U.S. financial institution routed through the infrastructure of a sanctioned jurisdiction is not deemed a violation of sanctions; the same analytical approach applies to the consensus layer of permissionless networks, which is neutral and protocol-mediated transmission. This distinction has been codified in the regulatory definition of the BSA itself, which expressly excludes those who "merely provide delivery, communication, or network access services used by money transmitters to support money transmission services." The BSA also distinguishes neutral carriage from transactions, and the sanctions analysis is based on the same characteristic of the relationship—namely, the absence of choice, direction, or transaction.

Although institutions trading on a permissionless network do have some contact with their unvetted operators, this contact is different from what sanctions laws regulate: in the latter case, neither party has chosen the other. From another perspective, in the nearly five years since OFAC issued its "Sanctions Compliance Guidance for the Virtual Currency Industry," there has not been any enforcement action based on a validator proposing a block that just happened to contain a transaction from a sanctioned party, nor has there been any enforcement action based on market participants paying fees at the protocol level.

Privacy and Compliance Are Compatible

The second concern raised by institutions is privacy: Can banks transact on a public ledger without exposing their customer positions, counterparties, and strategies to competitors?

The early supporters of permissionless ledgers reasoned that complete transparency serves as a compliance safeguard. Financial integrity requires something narrower: the necessary information can be verified by the institution, its counterparties, and its regulators or overseers. Cryptography has advanced to the point that institutions can prove compliance-related propositions without publicly demonstrating data—for instance, proving that counterparties are not on the Specially Designated Nationals (SDN) list, or proving that reserves exceed liabilities, without disclosing the identities of the ledger and counterparties. Source proofs allow one party to prove that assets originate from a self-identified illegitimate set without exposing their transaction graph. Confidential transaction designs encrypt the amounts and balances on the ledger while retaining a view key that the institution can provide to auditors.

The advancements in these cryptographic technologies collectively offer regulators higher security assurances than closed systems. Moreover, they provide no opportunity for competitors, which renders privacy no longer a justification for hindering the development of permissionless networks.

Some of these technologies are already in production, while others are still in the research and development phase. Address rotation and account abstraction have been deployed, along with integrated custody and layered custody structures that can remove customer-level details from the ledger; and message protocols for transmitting travel rule data simultaneously with on-chain transfers. While the confidentiality transfer functionality using audit keys is already live, its application at the institutional level remains limited. Unauthorized state proof and provenance proofs targeting specified data sets are still in pilot testing and research phases. However, solutions do exist: for instance, Privacy Cash is a privacy protocol based on Ethereum and Solana that uses zero-knowledge proofs for confidential transfers and swaps.

Risk Management Framework for Permissionless Networks

We propose nine components for a financial integrity program adapted to permissionless network activities: transaction-level controls applicable to institutional clients and counterparties, which are generally in the same form as today; and network-level controls targeting the infrastructure itself.

These controls do not require identifying validators, entering service level agreements with the protocol, or applying for membership with gatekeepers, as some other features of permissioned networks do: current financial integrity laws do not demand these.

The proposed framework is also consistent with recent U.S. legislation, the GENIUS Act. GENIUS also adopts a framework where AML/CFT and sanctions controls reside at the application layer, operated by entities that understand customer information and control assets. The GENIUS Act requires institutions authorized to issue payment stablecoins to demonstrate their existence of AML and sanctions compliance programs and maintain technical capabilities to execute legal directives for freezing or destroying circulating stablecoins. These obligations target the issuing entities, not the permissionless networks for circulating stablecoins.

Conclusion

In a previous generation, regulated financial institutions faced an open, global, permissionless network accessible to anyone, carrying traffic from both legitimate and illegitimate users. These institutions migrated their businesses to open protocols on the internet and built control mechanisms at the application layer. Today, similar practices can be adopted for permissionless networks.

Avoiding permissionless networks is not a financial integrity strategy; it effectively abandons the important role that U.S. financial institutions play in building a robust, data-rich, risk-based dollar financial system. Whether U.S. financial institutions participate or not, dollar transaction activities on permissionless networks have occurred and will continue. The efficacy of U.S. financial enforcement relies on monitoring the flow of funds, and the framework of financial integrity laws—including their enforcement and regulation—relies on U.S. financial institutions observing the activities they are required to monitor. Abandoning engagement with permissionless networks due to misunderstandings of relevant laws or concerns over past positions of regulatory agencies unnecessarily limits the choices of traditional financial institutions in meeting customer needs.