Key takeaways
- Banks and crypto exchanges freeze accounts and blacklist wallets as part of Anti-Money Laundering (AML), counter-terrorism financing (CTF) and sanctions compliance efforts.
- Global and regional cryptocurrency regulations, such as the EU’s MiCA framework and the FATF’s Travel Rule, require strict oversight of financial transactions, including those involving cryptocurrencies.
- Advanced tools like TRM Labs, Elliptic and Chainalysis enable institutions to monitor and trace financial and crypto transactions, identifying high-risk activities and wallets.
- The freezing of funds can lead to false positives, delayed access and poor communication, often causing frustration among users, as reflected in public complaints shared on platforms such as X.
Imagine waking up to find that your bank account or crypto wallet has been frozen, leaving you unable to access your funds.
Frustrating, right?
It’s a situation more people are finding themselves in as banks and centralized exchanges (CEXs) enforce stringent regulations under the banner of Anti-Money Laundering (AML) and financial crime prevention.
But what’s really driving these freezes? And how justified are they?
Let’s find out.
Why banks freeze accounts and crypto wallets get blacklisted
Freezing fiat or blacklisting crypto wallets isn’t random — it’s a process rooted in laws and policies that banks rely on and are designed to prevent criminal activities. For banks, freezes are often tied to three factors:
- Suspicious activity reports (SARs)
- Regulatory mandates
- Sanctions compliance.
Suspicious activity reports (SARs)
Banks are legally required to monitor transactions for unusual or suspicious behavior. If your transactions trigger red flags, such as sending or receiving unusually large sums, banks may file an SAR with authorities and freeze your account. Governments worldwide require financial institutions to comply with AML laws and counter-terrorism financing (CTF) regulations.
An SAR is essentially a formal notification sent to government authorities — e.g., the Financial Crimes Enforcement Network in the US — to alert them of potential money laundering, fraud or other illegal activities. While the report is filed confidentially, the bank may temporarily freeze your account to prevent any further transactions while the activity is investigated.
Regulatory mandates
Governments worldwide enforce AML laws and counter-terrorism financing regulations to prevent illicit financial flows. Banks must comply with these rules by carefully monitoring customer transactions, particularly large or unusual ones.
For example, if your account activity seems inconsistent with your usual financial patterns or triggers certain thresholds — e.g., depositing or withdrawing a very high amount — the bank may be required by law to freeze your account. This action helps ensure compliance with AML and CTF regulations while authorities review the flagged activity.
Sanctions compliance
International sanctions aim to restrict financial transactions with certain individuals, groups or countries involved in illegal activities, such as terrorism or violating human rights. Banks must ensure they don’t facilitate transactions with entities or regions listed on sanctions databases, such as:
- Office of Foreign Assets Control (OFAC) in the United States
- European Union’s restrictive measures.
For example, funds originating from countries like Iran or North Korea are subject to heavy scrutiny. If your transactions involve such regions, the bank may freeze your account to ensure compliance with sanctions regulations and prevent unauthorized access to global financial systems.
Blacklisting crypto wallets
Similar principles apply in the cryptocurrency industry. Centralized exchanges (CEXs), such as Binance or Coinbase, monitor blockchain transactions for illicit activities, including fraud, scams and money laundering. If a wallet address is flagged as suspicious, the exchange may blacklist it.
When a wallet is blacklisted:
- It cannot interact with the platform — e.g., deposit, withdraw, or trade assets.
- Users are effectively locked out of their funds until the matter is resolved.
This mechanism ensures that bad actors cannot exploit crypto platforms while maintaining the security and integrity of the ecosystem.
Did you know? The US government seizes Bitcoin (BTC) primarily through criminal investigations linked to activities such as fraud, money laundering and drug trafficking. This is done under asset forfeiture laws such as the Money Laundering Control Act of 1986, which allows Bitcoin to be seized as proceeds of illegal activities. A notable case is the seizure of 69,370 BTC from Silk Road funds in 2020, highlighting the coordinated efforts of law enforcement.
How global regulations and blockchain analytics are fighting financial crime in crypto
Governments and regulatory bodies across the world have imposed a slew of rules to fight financial crime. The European Union has adopted stricter AML rules under its Markets in Crypto-Assets (MiCA) framework. One notable rule requires crypto providers to collect and verify identity information for even unhosted wallets.
The FATF Travel Rule mandates financial institutions and crypto exchanges to share sender and receiver information for transactions above a certain threshold. Non-compliance often leads to freezes.
Wallets associated with sanctioned regimes — e.g., North Korea or Iran — are often blacklisted outright. Blockchain analysis tools like Chainalysis are used to trace and flag these wallets.
Also, onchain analytics tools have developed their capabilities with machine learning. Their sophistication enables them to track blockchain transactions across bridges and even to highlight if a token’s path has ever touched a mixer. Notably, mixers and crosschain bridges have been notorious escape routes for hackers in the past.
Did you know? Crypto mixers, like Tornado Cash, obscure transaction trails to enhance privacy. While some use them legitimately, they’re also exploited for laundering funds. In 2022, Tornado Cash was sanctioned by the US Treasury for allegedly aiding North Korea’s Lazarus Group in laundering billions of dollars.
How anti-money laundering is enforced in TradeFi and crypto
AML enforcement has grown increasingly sophisticated, blending human oversight with cutting-edge technology. It is essential to understand that AML has its roots in traditional finance (TradFi), and several of the controls framework for crypto transactions are inspired by the TradFi world.
With blockchains, the anonymity offered by crypto wallets poses a challenge to AML experts, while the end-to-end traceability of transactions onchain helps them. Banks use software to monitor transaction patterns in real time, flagging anomalies for review. While transaction monitoring helps with identifying patterns that money launderers use, blockchain analytics goes further.
Banks and crypto exchanges rely on advanced analytics tools to identify illicit activities. For example, a wallet receiving funds from a known darknet marketplace is likely to be blacklisted. Notable tools include:
- Elliptic: Focuses on providing insights into the flow of funds and identifying wallets involved in illegal activities.
- Chainalysis: One of the most widely used tools for tracing transactions, analyzing patterns and flagging high-risk wallets.
Both banks and exchanges mandate stringent Know Your Customer (KYC) processes. If discrepancies arise or documents seem falsified, accounts may be frozen until cleared. For larger transactions, both banks and exchanges can ask for sources and evidence of funds, such as bank statements, salary slips and more.
Risks and downsides of freezing funds
While these measures aim to curb financial crime, they’re far from perfect. Freezes and blacklists can cause significant headaches for legitimate users. Automated systems aren’t foolproof. Innocent transactions can be flagged, leading to wrongful account freezes. For example, a legitimate large transfer might trigger a freeze simply because it deviates from your usual patterns.
Lack of transparency: Users left in the dark
People often report being left in the dark when funds are frozen. Banks and exchanges might not communicate clearly, citing “security reasons” or ongoing investigations. Oftentimes, the requests from exchanges to gather evidence can also be unconventional and, in some regulatory jurisdictions, might land them in trouble. For instance,
- KuCoin’s controversial evidence requests: KuCoin asks users to record their screens using downloaded third-party tools. The screen recording is supposed to offer them the evidence to unlock user funds. However, KuCoin doesn’t own the liability of the user being exposed to cyberattacks due to the downloads that they suggest for the screen recording activities. Users get frustrated because of these freezes and withdrawal locking.
Once an account is frozen, accessing funds can take weeks, depending on how quickly the issue is resolved. In many cases exchanges and banks do not offer any meaningful explanations.
Real stories: The human side of frozen accounts
Social media is rife with complaints from affected users. Here are a few examples:
1. Bank account freeze in Australia
A user’s mother faced her only bank account being frozen after attempting to transfer funds to a Bitcoin exchange. Despite lengthy verification and compliance with the same bank for years, the account remained locked due to a “fraud” claim.
2. Frozen accounts due to crypto investments
A lawyer shared their experience of having $84,000 frozen by Commonwealth Bank because of crypto investments. They expressed frustration with not being able to use even a portion of their funds for basic needs like groceries, highlighting a perceived overreach by the bank.
3. Coinbase freeze frustration
Marina, a Coinbase user, shared her experience of being unable to send funds until Feb. 17, 2025. Coinbase cited compliance and security checks as the reason but refused to offer additional details, leaving her feeling powerless.
These social media posts capture the growing tension between users and institutions.
The need for balance
So, where does this leave crypto users?
Striking a balance between financial security and user rights is tricky but necessary. Banks and exchanges should inform users why their funds are frozen and how to resolve the issue. Reducing false positives requires more accurate transaction monitoring systems. Instead of locking an entire account, freezing just the suspicious amount could mitigate user inconvenience.
Independent bodies could oversee freezing decisions to prevent abuse or overreach. But most of all, it is critical that banks and exchanges keep their minds and communication channels open. Tagging all things crypto as money laundering can’t be the answer as we enter a new age of innovation.
Fiat freezing and crypto blacklisting are controversial but often necessary tools in the fight against financial crime. However, for legitimate users caught in the crossfire, the experience can feel more like punishment than protection.
Written by Arunkumar Krishnakumar