Effective Cryptocurrency Regulation Through Blacklisting

Anti-money laundering regulation aims to prevent illicit proceeds from being reintroduced into the legal economy. Existing regulation targets financial intermediaries with record keeping and reporting requirements, enabled by the verification of customers’ identities (KYC). These strategies fall short in cryptocurrencies, where transactions can be conducted without the involvement of regulated intermediaries. Transaction blacklisting is a complementary regulation approach, incentivizing users and requiring intermediaries to check coins against public blacklists of illicit funds before accepting them. Blacklisting works on top of many existing cryptocurrencies today, improves anti-money laundering outside of regulated intermediaries and protects innocent users from inadvertently accepting illicit funds. In this paper, we discuss the intricacies of blacklisting, how it would change the Bitcoin ecosystem and how it can remain effective in the presence of privacy-preserving cryptocurrencies. We hope this paper provides a starting point for discussions among researchers, regulators and the cryptocurrency ecosystem around blacklisting. 1