A long-standing requirement in banking is that information about the sender and recipient travels alongside a payment. Extending that to crypto transfers is conceptually simple and practically awkward.
The original rule concerned wire transfers
When a bank sends funds to another bank, identifying details about both parties accompany the payment through the messaging system used to instruct it.
The purpose is to let each institution along the path see who is involved rather than only that value moved.
The messaging network and the settlement network are separate systems, which is what makes the arrangement workable.
Blockchains carry value without carrying details
A blockchain transaction contains addresses and an amount. There is no field for a name, no accompanying message and no institution in the middle.
Applying the requirement therefore means service providers exchange the information separately while the value moves on chain.
The two channels are unconnected, so matching a received message to a specific transaction requires coordination the chain does not provide.
A receiving provider may see funds arrive before any accompanying information does, or receive information about a transfer that has not yet confirmed, and both cases have to be handled.
Interoperability is the practical obstacle
Providers must be able to find each other, agree on a message format, and verify that the counterparty is who they claim to be.
Several competing frameworks emerged to solve this, and a transfer between providers using different systems is harder than one between users of the same system.
Adoption also varies widely by jurisdiction, so a transfer crossing borders may meet a counterparty with no equivalent obligation at all.
Self-custody addresses break the model
The rule assumes an institution at each end, and a withdrawal to a personal wallet has an institution at only one.
Providers respond by collecting information about the destination from the customer, sometimes with a request to demonstrate control of the address.
Approaches to this differ significantly between jurisdictions, and the details are among the most actively revised parts of the framework.
Demonstrating control usually means signing a message from the destination address or sending a small confirming transfer, neither of which is possible for every wallet a customer might use.
Thresholds and scope vary
Most implementations apply above a value threshold, with reduced requirements below it, and those figures are set locally rather than globally.
What counts as a covered business also varies, particularly for arrangements that do not fit the shape of a conventional exchange.
Because both the thresholds and the definitions change, anyone operating a service subject to these rules needs current guidance for each jurisdiction they serve.