Only 1% of self-custody wallet transaction volume involves exposure to illicit counterparties, which is substantially lower than commonly assumed rates.
Research from Global Digital Finance (GDF) and Block, in partnership with TRM Labs and Coinbase, found the rate of exposure to counterparties categorised as illicit for self-custody wallet transactions was comparable to or below estimates for traditional financial channels.
In the United Kingdom, where robust Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) controls are in place at exchange level, the rate of exposure fell to just 0.1%.
As a result, the report recommended regulators reject the automatic higher-risk classification of self-custody transactions. It said regulatory frameworks and supervisory guidance should not treat transfers to or from unhosted wallets as inherently elevated-risk, and that risk assessment should be driven by transaction characteristics, counterparty exposure and behavioural indicators.
The key findings from the research supported a risk-based, evidence-informed approach to self-custody wallet regulation. The report also recommended the preservation of the infrastructure-intermediary distinction, as self-custody tools function as infrastructure (analogous to physical wallets or safes) rather than intermediaries.
Lawrence Wintermeyer, company board chair at GDF, said: “As the digital finance economy grows beyond stablecoins to tokenised stocks and shares, and commodities like gold and silver, which are now becoming popular for many consumers, the role of the self-hosted wallet is extending beyond currency to the buying and selling of real-world assets and managing your investment portfolio.
“This report is a must-read for industry executives, policymakers, and regulators. It highlights the growth and importance of self-hosted wallets in digital finance, the big use cases, and debunks the myths about the role of self-hosted wallets in financial crime.”
