Public blockchains operate as permissionless networks where anyone can send digital assets to any address at any time. This open architecture creates a fundamental technical challenge for compliance teams tracking the flow of funds. Digital assets rarely travel in straight lines. They often move through multiple intermediate wallets before reaching a final destination. This multi-hop dynamic makes blockchain compliance fundamentally different from traditional banking, where every transfer requires prior institutional approval.
It’s important to look at this indirect exposure to understand how sanctions enforcement works in crypto. Recent media reports alleged that Binance processed $1.7 billion in transactions connected to sanctioned Iranian entities, highlighting a broader issue. And this is: traditional financial regulations are not built for the technical realities of decentralized networks and modern crypto platforms. This means new regulatory, legal and compliance frameworks need to be built to manage the new reality of how money moves.
How Multi-Hop Transactions Work
In traditional finance, a bank transfer moves directly from sender to receiver. Blockchain transfers operate differently. Funds typically move from an initial wallet through a sequence of intermediate addresses before reaching their ultimate destination. Binance Global Head of Sanctions Astra Cai explains the operational reality of this process. “Blockchain transactions normally are multi-hop transactions. What does multi-hop mean? That means that there will be multiple steps… all these intermediate wallets are not a sanction wallet at the time of the transactions.“
The 💜 of EU tech
The latest rumblings from the EU tech scene, a story from our wise ol’ founder Boris, and some questionable AI art. It’s free, every week, in your inbox. Sign up now!
This creates a scenario known as three degrees of separation. An exchange might process a deposit from an intermediate wallet that appears completely clean. Only later, after the funds have completed their multi-step journey, does law enforcement identify the final receiving wallet as a sanctioned entity. At the exact moment the exchange processed the intermediate transfer, industry-standard on-chain surveillance tools did not flag any of those middle addresses.
This is the crux of the latest allegation against Binance which suggested the exchange allowed Iran backed terrorism groups to funnel money through the platform and covered it up by firing compliance officers who flagged the transactions. According to Binance, their internal reviews found no evidence of users directly transacting with sanctioned parties. The exposure was entirely indirect. The funds flowed through layers of unaffiliated wallets before reaching a destination that authorities only later categorized as restricted.
During a recent interview on The David Lin Report, Binance Chief Compliance Officer Noah Perlman responded, “The idea that we would dismiss employees for raising something, it’s just actually preposterous on its face, as evidenced by the fact that the investigation continued, the relevant accounts were offboarded and relevant reporting was made.”
The Limitations of Real-Time Sanctions Screening
The core compliance gap stems from how sanctions designations are timed. Sanctions lists are inherently retrospective. Government authorities typically designate wallets long after identifying problematic behavioral patterns. Cryptocurrency platforms screen transactions against the current regulatory lists available at the exact moment a transfer occurs. If an address is added to a sanctions list after funds have already passed through it, the preceding transfers were not regulatory violations when they happened.
“We can only know what we can know. We can’t take proactive activity if wallets haven’t been sanctioned yet. If they’re sanctioned after the fact, then we can react to that, but we can’t be held responsible for blocking funds to wallets that at the time were not sanctioned,” said Perlman.
In the recent cases involving alleged Iranian exposure, reports indicate that none of the users in question were on sanctions lists at the time they were active on the platform. Even while utilizing premium blockchain analytics tools, compliance teams cannot predict which seemingly random alphanumeric addresses will be flagged by US authorities months in the future.
Why Exchanges Rely on Post-Receipt Controls
Because blockchain networks are entirely permissionless, digital assets arrive in exchange deposit addresses without any prior approval process. This technical architecture means risk exposure cannot be reduced to absolute zero on any centralized trading platform. Instead of attempting to block every incoming transfer, major exchanges must rely on extensive post-receipt controls. This involves deploying robust on-chain monitoring software, conducting continuous screening, and executing rigorous post-receipt investigations.
The operational response kicks in when a compliance department receives credible intelligence about problematic transaction patterns. The platform investigates the data, offboards the suspicious accounts, mitigates further exposure, and reports the findings to the appropriate authorities. Binance employs more than 1,500 compliance staff globally to deal with this workload.
When properly sourced, these retrospective mitigation strategies are highly effective, at least this is what the data suggests. Binance recently reported a 96.8% reduction in its sanctions-related exposure from early 2024 to mid-2025. The exchange also processed more than 71,000 law enforcement requests and assisted authorities in confiscating over $131 million in illicit funds throughout 2025.
The true measure of an effective compliance program is not the complete absence of risk. But rather the speed and thoroughness of the response once new threat data becomes available.
Bridging Traditional Sanctions Frameworks and Blockchain Reality
Multi-hop transactions represent a fundamental technical hurdle that requires regulators to rethink traditional enforcement mechanisms. The standard measure of corporate compliance must evolve. It has to change from demanding absolute prevention to evaluating the strength of a platform’s detection and response capabilities.
Lawmakers and agencies are currently in the process of drafting blockchain regulatory frameworks, the Clarity Act is just one example in the US. While they are working on the rules, they must account for the mechanical realities of permissionless networks.
What regulators and market players need to understand is that multi-hop dynamics and indirect exposure are critical for creating effective public policy. Without acknowledging the three degrees of separation that define on-chain transfers, regulators risk holding technology companies to enforcement standards that are mathematically impossible to achieve in real time.
