What does a holistic understanding of the customer mean when their financial history is on-chain?

AMLA has published its final draft Regulatory Technical Standards on Customer Due Diligence under Article 28(1) of the AML Regulation. There is a lot in the document, but one phrase immediately caught my attention: financial institutions need to develop a “holistic understanding of the customer.” I think this is particularly relevant when we look at customers who hold digital assets, because blockchain data gives us the opportunity to understand a part of their financial history in a level of detail that we have rarely had before.

Think about a customer transferring €500,000 from a crypto exchange into their bank account. We can identify the exchange, analyse the transaction and establish which wallet sent the assets to the exchange. From there, we can start going further back. Perhaps the customer originally invested €50,000 five years ago, moved those assets between several exchanges and self-hosted wallets, traded different assets, participated in DeFi and gradually accumulated the €500,000 that eventually arrived at the bank. All of those transactions together describe how the customer arrived at their current financial position, and blockchain data allows us to reconstruct large parts of that history.

This becomes particularly interesting when we look at how AMLA describes Source of Funds. The final draft RTS refers to understanding both the activity that generated the funds and the means through which the customer’s funds were transferred. Those are two important parts of the same question. We want to understand how the value was created or acquired, and we want to understand how that value subsequently moved before reaching the financial institution. With digital assets, much of that journey can potentially be reconstructed from blockchain and exchange data.

Once you start looking at the problem this way, the customer naturally becomes the centre of the analysis. A customer may have several self-hosted wallets, accounts at different exchanges, holdings across different assets and years of transactions with exchanges, protocols and other counterparties. When these data points are connected, they form a financial history around that customer. We can see how assets entered their portfolio, how those assets developed over time, where significant increases in wealth occurred, which counterparties played an important role and how funds eventually moved into the traditional financial system.

That creates an interesting opportunity for Source of Funds and Source of Wealth investigations. Financial institutions already use documents such as bank statements, payslips, contracts, tax records and company information to understand the economic background of their customers. Blockchain and exchange data add another evidence source to that process. An investigator can connect the explanation provided by the customer with observable financial activity and use both to reconstruct an increasingly complete picture of how the customer’s crypto wealth was accumulated.

The same data can also be translated into something much more useful for an investigator. A customer may have tens of thousands of blockchain transactions, while the economic story behind those transactions may consist of a relatively small number of important events. An initial investment was made, assets appreciated, trading generated additional returns, funds moved between wallets belonging to the customer, several significant counterparties were involved and eventually part of the portfolio was converted into euros. Turning the underlying transaction history into those economically meaningful events makes the blockchain history understandable and gives the investigator something that can actually be used in a Customer Due Diligence decision.

The risk-based approach within the European AML framework fits naturally with this. Different situations require different levels of understanding, which means that the depth of the analysis can grow with the questions raised by the customer profile and their activity. In many cases, a relatively limited analysis may already provide sufficient understanding. Where additional risk indicators or unexplained activity appear, more wallets can be attributed, a longer transaction history can be reconstructed, counterparties can be analysed and Source of Funds or Source of Wealth can be examined in greater detail. This creates a proportional process in which the amount of investigation follows the level of understanding required for the decision.

I also found it interesting that AMLA explicitly recognises reputable commercially available service providers, including analytical services, as potential sources when establishing Source of Funds and Source of Wealth. Blockchain analytics has developed enormously over the past years, and the data can now support a much broader part of the Customer Due Diligence process. Exposure to known risk categories remains one useful signal, while transaction history, wallet relationships, counterparties, holdings and exchange activity can together help explain how a customer’s financial position developed.

This is also how we have increasingly started to think about the problem at Cense. When on-chain and off-chain information is connected around the customer, individual wallets, transactions and exchange accounts become parts of the same financial picture. From there, we can calculate and explain where funds came from, how wealth accumulated, which activity matters from a compliance perspective and whether the resulting financial history is consistent with what the financial institution knows about the customer.

For me, this is what makes the wording in the AMLA RTS particularly interesting. A “holistic understanding of the customer” gives us a useful objective for thinking about digital asset compliance. As crypto becomes a normal part of people’s financial lives, banks will increasingly have customers whose financial history exists partly in their traditional accounts and partly on-chain. Connecting those two worlds gives financial institutions the opportunity to build a much richer and more explainable understanding of the customer.

Blockchain data therefore has a much bigger role to play in Customer Due Diligence than identifying individual transactions or wallets. It can help us reconstruct the financial history behind the customer and connect that history with everything the institution already knows about them. I think that is where the next generation of crypto compliance is heading: using on-chain and off-chain data together to create a holistic understanding of the customer.