Rethinking the Debate: AML KYC in Crypto and Traditional Finance

The ongoing debate between crypto advocates and traditional financial institutions over AML (Anti-Money Laundering) and KYC (Know Your Customer) compliance often focuses on whether banks impose excessive controls on Web3 and crypto firms. Many in the crypto space argue that traditional finance institutions apply disproportionately harsh measures, restricting access to banking services and stifling innovation. However, rather than framing the discussion around whether banks are being “too strict,” the focus should return to the fundamental purpose of AML and KYC controls — to prevent illicit financial activity, protect financial integrity, and ensure that bad actors do not exploit financial systems.

If financial crime is the issue at hand, then the real question is not how far controls banks impose, but rather how effectively VASP / crypto firms implement their own AML measures. Instead of criticizing banks for being too stringent, the crypto industry should shift the conversation toward how Web3 firms can enhance their own compliance efforts in a way that is both reasonable and effective.

AML and KYC regulations exist for a clear reason: to prevent financial systems from being used for money laundering, terrorist financing, and other illicit activities. Traditional banks operate under strict regulatory obligations that require them to identify customers, monitor transactions, and report suspicious activity. These measures are not about stifling businesses but about ensuring that financial intermediaries do not become conduits for criminal activity.

The same principle applies to Virtual Asset Service Providers (VASPs) and other crypto firms. As financial intermediaries, they also bear the responsibility of mitigating financial crime risks. While the decentralized nature of Web3 presents unique challenges, this does not exempt the industry from implementing robust AML controls. Rather than questioning whether banks are too strict, crypto firms should ask themselves:

• What AML frameworks have they put in place to detect and deter illicit activity?
• How can their compliance measures be both effective and aligned with the decentralized principles of Web3?
• What role do they play in ensuring that financial integrity is maintained within the crypto ecosystem?

One of the core tensions in Web3 AML compliance is the conflict between regulatory requirements and decentralization. Unlike traditional banks, which operate under centralized governance, many crypto firms — especially those involved in DeFi (Decentralized Finance) — operate without centralized intermediaries. This creates a fundamental challenge in applying traditional AML approaches, as many DeFi platforms lack direct control over user identities and transactions.

However, this does not mean that effective compliance is impossible. The crypto industry has access to advanced blockchain-based tools that can enhance AML enforcement while maintaining decentralization, such as On-Chain Analytics; Decentralized Identity Verification; and Smart Contract Audits. By implementing these measures, crypto firms can demonstrate that AML compliance does not have to come at the cost of decentralization, but rather can be adapted to fit the unique nature of blockchain finance. Of course, proper Customer Due Diligence and risk-based approach on boarding and ongoing monitoring mechanisms in dealing with identified users, should be in place similar to traditional intermediaries.

Instead of focusing on whether banks apply excessive AML restrictions, crypto firms should take the lead in proving that their compliance measures are relevant and effective in preventing financial crime. A more constructive approach would be to ask:

1. Are crypto firms truly effecting AML measures, or are they merely reacting to regulatory pressure?
2. What steps are being taken to ensure that illicit actors cannot exploit their blockchain-based financial services?
3. How can crypto firms build trust with regulators and financial institutions by demonstrating proactive compliance efforts?

Financial institutions, regulators, and VASP / crypto firms should not be at odds when it comes to AML compliance. Instead, it should be a collaborative effort where all players work towards a common goal: preventing financial crime while fostering innovation.

The debate over AML and KYC in Web3 should not be about whether banks are too strict, but about how VASP / crypto firms can take ownership of compliance in a way that aligns with the decentralized ethos of blockchain technology. Effective AML enforcement is a shared responsibility, and crypto firms must recognize that they play a crucial role in maintaining financial integrity.

Rather than positioning themselves as victims of excessive regulation, the crypto industry should take the initiative to develop and implement compliance solutions that protect the financial system while preserving decentralization. By doing so, they can shift the conversation from resistance to regulation to proactive engagement in financial security, ultimately strengthening their legitimacy within the broader financial ecosystem.