Why RegTech Must Evolve for Smart Account Adoption

Legacy AML/KYC tools screen static EOAs, but smart accounts (ERC-4337) are dynamic, multi-signature, and upgradeable contracts. This creates false positives for sanctioned fund flows and massive blind spots for illicit activity hiding behind legitimate user ops.\n- ~90% of DeFi TVL flows through smart contracts, not EOAs.\n- Screening a single user's activity may require analyzing dozens of ephemeral addresses.

Next-gen RegTech must analyze user intents and transaction semantics, not just addresses. This means monitoring the UserOperation mempool, tracing flows through Paymasters and Bundlers, and applying policy at the intent settlement layer (e.g., UniswapX, CowSwap).\n- Enables real-time compliance for gas sponsorship and account abstraction.\n- Shifts focus from 'who owns this key' to 'what is this transaction trying to do'.

Compliance must be a native, programmable layer for smart accounts. Think compliance-as-a-smart-contract, where rules are enforced on-chain via Attestations (EAS) or ZK proofs, not off-chain black boxes. This enables granular, user-controlled privacy and auditability.\n- Modular security stacks (e.g., Safe{Wallet} modules) can integrate sanctioned list oracles.\n- Creates a clear regulatory primitive for institutions to adopt ERC-4337 at scale.

Without this evolution, smart accounts remain a retail toy. The $10B+ institutional DeFi market and future RWAs require compliant, non-custodial infrastructure. The winners will be protocols that bake compliance into the stack, not bolt it on.\n- Layer 2s (e.g., Base, Arbitrum) seeking enterprise adoption are the primary catalysts.\n- This is the missing piece for mass adoption beyond speculative trading.

Regulators target wallet addresses, but EOAs are single-key, non-upgradable, and lack session controls. This forces blunt, user-hostile actions like blacklisting entire addresses, freezing funds, and killing composability.

• Kills UX: One sanctioned transaction can brick a wallet's entire history.
• No Granularity: Cannot apply policy to specific assets or smart contract interactions.
• Anti-Composability: Blacklisted addresses cannot interact with DeFi pools, breaking the financial stack.

Protocols like Rhinestone and ZeroDev are enabling modular, compliance-aware account abstraction. Compliance logic becomes a verifiable, attachable module, not a network-level mandate.

• Modular Compliance: Users or dApps attach KYC/AML modules as needed for specific actions (e.g., high-value transfers).
• Session Keys with Limits: Grant temporary, restricted signing power to comply with travel rules or transaction limits.
• Upgradable Identity: Compliance status can be updated without changing the core account address, preserving reputation.

Regulatory state must be a portable, verifiable credential. Ethereum Attestation Service (EAS) and Verax are becoming the ledger for compliance proofs, separating attestation from enforcement.

• Sovereign Proofs: KYC providers (e.g., Coinbase Verifications) issue on-chain attestations linked to a smart account.
• Cross-Chain Portability: A compliance attestation on Base can be verified on Arbitrum or Optimism via LayerZero or Hyperlane.
• Selective Disclosure: Accounts prove regulatory status without exposing full identity, aligning with privacy tech like zk-proofs.

Real-time screening must move from RPC endpoints to the account level. Chainalysis and TRM APIs are being integrated into smart account logic to pre-validate transactions against sanctions lists.

• Pre-Execution Checks: Smart accounts can query compliance oracles before signing, preventing failed/blocked transactions.
• DeFi Gateway Compliance: Protocols like Across and UniswapX can require compliant intent bundles for large cross-chain swaps.
• Auditable Trails: Every screened transaction creates an immutable compliance log, simplifying regulatory reporting.

The winners will abstract compliance complexity from developers. Startups are building SDKs that let dApps toggle KYC requirements per feature, monetizing access to regulated liquidity.

• Differential Access: Offer higher yields or leverage to verified users, creating a compliant tiered system.
• Embedded Finance: A game can offer cash-out features only to KYC'd players, using Stripe-like flows from Crypto APIs.
• Revenue Share: dApps pay for managed compliance services based on volume, creating a $1B+ SaaS market on-chain.

The final evolution: prove regulatory compliance without revealing identity. zk-proofs (via RISC Zero, Polygon zkEVM) allow users to generate a proof of a valid KYC check from a trusted provider.

• Privacy-Preserving: Interact with a regulated DeFi pool like Aave by proving you are KYC'd, not who you are.
• Cross-Jurisdiction: Proofs can encode specific jurisdictional rules (e.g., EU MiCA compliant, US accredited investor).
• The Regulatory Holy Grail: Auditability for authorities, privacy for users, and composability for developers.

Legacy AML tools screen static EOAs, failing to analyze the programmable logic and multi-party permissions of a smart account (ERC-4337). This creates a massive blind spot for risk.

• False Positives: Blocking a safe, multi-sig social recovery wallet.
• Regulatory Arbitrage: Bad actors hide behind compliant entry points like Coinbase or Binance before moving funds to a private account.
• No Chain Abstraction: Screening must now cover EVM L2s, Solana, and emerging SVM chains, not just Ethereum mainnet.

Next-gen RegTech must monitor the user's declared intent (e.g., via UniswapX or CowSwap) and the account's security policy (e.g., 2-of-3 signers required). Compliance becomes a function of the transaction's logic, not just its origin.

• Programmable Compliance: Embed rules directly into the account's validation logic using Safe{Core} or Rhinestone modules.
• Real-Time Risk Scoring: Analyze cross-chain flows via LayerZero or Axelar messages, not just single-chain deposits.
• Audit Trails: Immutable logs of which policy rule allowed/rejected a transaction, satisfying SEC and MiCA requirements.

Know-Your-Transaction (KYT) must evolve to map fund flows through account abstraction paymasters, gas sponsorship, and batch transactions. The unit of analysis shifts from an address to a user operation.

• Paymaster Risk: Screening the entity (e.g., Pimlico, Stackup) paying fees, which can obscure the true fund source.
• Session Key Analysis: Monitoring time-bound permissions granted to dApps, a major vector for exploit.
• Modular Integration: Plug-and-play compliance modules for Safe, Biconomy, and ZeroDev smart account SDKs.

Incumbent blockchain intelligence firms built their models on Bitcoin and Ethereum EOA heuristics. Their survival depends on integrating with Account Abstraction Infra like Alchemy, Blocknative, and Gelato.

• Data Partnerships: Access to mempool data and userOp bundlers is now more critical than on-chain finality.
• New Metrics: Tracking social recovery attempts, fee logic changes, and delegate call patterns.
• Enterprise SDKs: Providing compliance toolkits for banks like JPMorgan and Fidelity to custody smart account keys.