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

This article is from the Spinach Spinach article and was compiled, compiled and contributed by ForesightNews. (Synopsis: There is a deposit disaster in the Taiwan community, many exchanges have no follow-up, and SNS shouts "refuse to use Taiwan exchanges") (Background supplement: single digits!) Taiwan's virtual currency service providers "now have 8 left", crypto oligarchy competition begins) This is the current state of crypto regulation in 2025: an expensive game that all participants know is a joke, but all have to continue to perform. Spinach recently read a recent briefing paper published by the Bank for International Settlements (BIS), "Anti-Money Laundering Compliance Scheme for Crypto Assets"[1]. As the central bank of the world's central banks, every report of the BIS will become a bellwether for financial regulation in various countries. So when I saw the headline, my first reaction was: Finally, someone has figured out a way to control cryptocurrency? However, reading the entire article, I realized that this paper is not a usable solution and may seem more like a decent surrender to me. BIS uses academic language to euphemistically admit a cruel truth: the KYC/AML system of traditional finance has completely failed before the decentralized cryptographic interface. What are their "innovative" proposals? Score the wallet, encourage users to check whether the other party is compliant, and do the final check at the place of deposit and withdrawal. This is like a martial arts master, who has practiced eighteen palms of the dragon all his life, and suddenly finds that the opponent is driving a tank, so he suggests that everyone put a sign at the city gate: "Tanks are forbidden to enter." Not to mention how high the implementation cost and coordination cost of scoring are, even if it is implemented, what should I do if others throw a few poisons into the high-score wallet account? Encouraging users to check for themselves is like asking you to check if the bill has been used to buy drugs when you collect dollars. What works in theory, absurd in practice. KYC/AML in deposits and withdrawals may be the last decent thing left for these traditional institutions, at least you can verify your identity and source of funds. Why is the traditional regulatory system almost completely ineffective on-chain? This brings us to a ridiculous regulatory rule that regulators around the world continue to implement: 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 understand its past and present. In 1996, when the Internet was still dial-up, the Financial Crimes Enforcement Network (FinCEN) first introduced Travel Rule as part of the Bank Secrecy Act. The requirement was simple: Banks processing wire transfers above $3,000 had to pass the sender's information to the next financial institution. This works well in the traditional banking system, why? Because banks are centralized, have complete customer information, and have standardized information transmission systems like SWIFT. ICBC knows everything about Zhang San, and CCB knows everything about Li Si, and exchanging information when transferring money is a natural success. But in 2019, the Financial Action Task Force (FATF) made a game-changing decision: extend the Travel Rule suite to cryptocurrency. What is the FATF? An intergovernmental body established in 1989 to combat drug money laundering. Its "40 Recommendations" are considered the global gold standard for anti-money laundering. When the FATF speaks, regulators around the world listen. On June 21, 2019, the FATF adopted an explanatory note (INR.15) on Recommendation 15 in Orlando, applying the Travel Rule extension to the virtual asset space that originally applied to wire transfers from traditional financial institutions. Virtual Asset Service Providers (VASPs) are required to collect and transmit identity information of the sender and receiver when processing transactions exceeding $1,000 USD/EUR, including: Name Account number (wallet address) Geolocation or ID number More details if needed Their logic is: since Travel Rule has been in operation in traditional finance for more than 20 years, it should be fine in the crypto world. The problem with this logic is that they don't understand how blockchain works at all. Let's take a look at the current state of travel rule implementation. According to the FATF's June 2025 report, 99 jurisdictions claim to have passed or are in the process of passing Travel Rule legislation. Sounds awesome, right? But the devil is in the details. 75% of jurisdictions are still only partially compliant or non-compliant [2], exactly the same as in April 2023 – 75% out of 73 countries, zero progress. Why is this? Because every country is engaged in its own set. The U.S. maintains the old 1996 rule: the $3,000 threshold. But the FATF recommended $1,000, and the first split occurred. Singapore was one of the first countries to respond, starting on 28 January 2020 with a threshold of S$1,500. South Korea implemented on March 25, 2022, with a threshold of 1 million won (about 821 US dollars). Japan says all transactions, regardless of the amount. The European Union is even more desperate, delaying the implementation of the Fund Transfer Regulation (TFR) until December 30, 2024, and then saying: We have no threshold, 1 euro cent also needs a Travel Rule. The result? A $1500 transfer from the United States to the European Union, the United States said no Travel Rule, the European Union said it must. Both parties are "compliant", but the deal is stuck. And that's not the most confusing. Israel implemented the Travel Rule in 2021 with zero threshold, but almost no other country has connected with it. Canada also has zero threshold, but its rules are incompatible with other countries. What is the result of this fragmentation? According to Notabene's 2024 Industry Survey [3], despite an improvement from the previous year (from 52% to 29%), 29% of VASPs continue to indiscriminately transmit Travel Rule information to all counterparties without conducting any due diligence assessment. This "casting a wide net" actually reflects an awkward reality: most VASPs are just formalities, because there is no way to verify whether the adversary is actually using this information and whether it is compliant. DeFi: The Dead End of the Travel Rule While regulators are still struggling with the Travel Rule of centralized exchanges, DeFi has completely bypassed this problem. The premise of the Travel Rule is that there is a VASP (intermediary) to enforce it. I use MetaMask to exchange coins directly on Uniswap, may I ask: Is MetaMask VASP? It's just a browser plugin Is Uniswap VASP? It's just a piece of code Is Ethereum Miner VASP? They simply verify the transaction when the two parties to the transaction are directly peer-to-peer transactions, and there is no intermediary at all to execute the Travel Rule. It's like...