Regulatory Query Interface

Protocols integrate an RQI to perform real-time sanctions checks on wallet addresses during transactions. This allows for:

• On-chain compliance: Blocking interactions with wallets on OFAC's SDN List.
• Automated policy enforcement: Embedding compliance logic directly into smart contracts or dApp frontends.
• Audit trails: Creating immutable records of compliance checks for regulatory reporting.

Example: A DeFi lending platform queries an RQI before processing a loan to verify the borrower's address is not sanctioned.

Financial institutions use RQIs to verify the regulatory status of on-chain entities before engaging. This is critical for:

• Institutional DeFi: Ensuring counterparties in OTC trades or vault deposits are verified.
• Fund onboarding: Screening investor wallets against Anti-Money Laundering (AML) databases.
• Regulatory reporting: Pulling attested KYC credentials to satisfy jurisdictional requirements like Travel Rule compliance.

This bridges the gap between traditional finance's identity frameworks and blockchain's pseudonymity.

dApps and services implement geographic access controls by querying an RQI for a user's proven jurisdiction. Use cases include:

• Token distribution: Airdropping tokens only to wallets verified in permitted regions.
• Service restriction: Limiting access to trading or staking features based on IP address or proof-of-residency attestations.
• Dynamic compliance: Adapting a user's interface and available actions in real-time based on their regulatory zone.

This allows global platforms to operate within complex, fragmented regulatory landscapes.

Autonomous smart contracts use RQIs as compliance oracles to make conditional decisions. For example:

• A decentralized autonomous organization (DAO) treasury contract could query an RQI to ensure a grant recipient is not a prohibited entity.
• A cross-chain bridge might verify the regulatory status of a destination chain's validators before locking funds.
• Rebasing or reward contracts could adjust yields based on the compliance tier of the holder's wallet.

This embeds regulatory logic directly into decentralized business logic without centralized intermediaries.

Analysts and auditors leverage RQIs to investigate transaction histories and entity relationships for compliance purposes.

• Transaction monitoring: Screening historical flows for connections to high-risk addresses or mixing services.
• Entity clustering: Using attested identity data from RQIs to map wallet clusters to real-world entities for risk assessment.
• Proof of compliance: Generating verifiable reports that a protocol or fund conducted necessary checks at specific block heights.

This turns raw blockchain data into actionable compliance intelligence.

Allows protocols to dynamically adapt to changing regulations by querying an authoritative source for the current rules of a specific jurisdiction. For example, a decentralized exchange could query:

• The maximum leverage allowed for retail traders in the EU.
• The list of sanctioned wallet addresses from an OFAC-equivalent list.
• Tax treatment rules for a specific token type. This moves compliance from hard-coded, static logic to a dynamic, updatable system.

Facilitates compliance with the Financial Action Task Force (FATF) Travel Rule, which requires Virtual Asset Service Providers (VASPs) to share sender/receiver information for transactions above a threshold. An RQI can enable:

• VASP discovery: Identifying if a counterparty wallet belongs to a regulated VASP.
• Secure data exchange: Transmitting required beneficiary and originator information through a private, compliant channel in tandem with the on-chain transaction.

Used by risk engines and asset managers to assess the regulatory standing of integrated protocols. Before routing user funds, a smart contract can query an RQI to confirm:

• Whether a lending protocol is licensed in the user's jurisdiction.
• If a liquidity pool's assets are compliant (non-securities).
• The regulatory risk score of a yield aggregator. This creates a compliance layer for automated DeFi strategies and institutional onboarding.

Enables automated calculation of tax obligations by querying authoritative sources for:

• Cost-basis accounting methods (FIFO, LIFO) allowed per jurisdiction.
• Token classification (property, currency, security) for determining tax rates.
• Real-time reporting requirements for transactions. Wallets and accounting dApps can use this to provide users with accurate, jurisdiction-specific tax estimates and generate compliant reports directly from on-chain activity.

Manages the complexity of cross-jurisdictional transactions by allowing smart contracts to validate transfers against the regulatory frameworks of both the sender's and receiver's locations. The RQI can be queried for:

• Transfer eligibility: Checking if a token can be sent to a specific country code.
• Threshold-based rules: Applying different KYC requirements based on transaction value and destination.
• Embargo and sanction checks: Verifying neither party is on a prohibited list. This is foundational for global stablecoin payments and remittance corridors.

A core privacy principle for an RQI is to expose only the data legally required. Instead of providing full node access, the interface should implement selective disclosure mechanisms. This can involve:

• Zero-Knowledge Proofs (ZKPs) to prove compliance (e.g., a user is not on a sanctions list) without revealing identity.
• On-Chain Access Controls that gate data behind specific permissioned smart contracts or oracles.
• Query Scoping to limit responses to the specific transaction, address, or time window requested.

Preventing unauthorized access to the RQI is paramount. A robust security model requires:

• Cryptographic Authentication of querying entities (e.g., regulators, licensed VASPs) using API keys or client certificates.
• Granular Role-Based Access Control (RBAC) to enforce the principle of least privilege, ensuring entities can only query data within their legal jurisdiction and mandate.
• Audit Logging of all queries, including the requesting entity, timestamp, and query parameters, creating an immutable trail for oversight and accountability.

The RQI must be designed to resist manipulation by any single party to prevent abuse. Key considerations include:

• Decentralized Oracle Networks to source and verify off-chain legal data (e.g., sanctions lists), avoiding a single point of failure or truth.
• On-Chain Enforcement where compliance rules are codified in immutable, auditable smart contracts, not mutable backend servers.
• Transparency of Rules where the logic determining a "match" or "flag" is publicly verifiable, preventing hidden censorship criteria.

This is the fundamental tension an RQI must navigate. Technical implementations aim to balance these competing demands:

• Privacy-Preserving Compliance: Using techniques like ZKPs or secure multi-party computation to satisfy regulatory checks without exposing personal data.
• Proportionality: Designing queries that are specific and narrow, avoiding dragnet surveillance of the entire chain.
• Legal Safeguards: The interface should technically enforce that data is only disclosed upon presentation of valid legal process, mimicking warrants in traditional finance.

Poorly implemented RQIs introduce significant risks:

• Centralization Risk: If the interface relies on a single server or oracle, it becomes a high-value target for attack or coercion.
• Data Leakage: Insecure APIs can expose sensitive data beyond the intended recipient.
• False Positives/Negatives: Flawed query logic can wrongfully flag legitimate users or miss illicit activity, leading to legal and reputational damage.
• Front-Running: If query patterns are detectable, malicious actors could infer ongoing investigations.

The Financial Action Task Force (FATF) Travel Rule requires VASPs to share sender/receiver information for transactions over a threshold. An RQI for this might:

• Use a decentralized identity (DID) system where users control verifiable credentials.
• Employ a permissioned blockchain or sidechain (e.g., Baseline Protocol, Corda) for secure, private data sharing between obligated entities.
• Leverage hash-based commitments to prove information was shared without broadcasting it on the public ledger.

KYT is a real-time, transaction-focused compliance process for monitoring blockchain activity for risk. Unlike static KYC, which verifies user identity, KYT analyzes transaction patterns, counterparties, and fund sources for signs of illicit finance (e.g., money laundering, sanctions evasion). It is a core use case for a Regulatory Query Interface, enabling automated compliance checks on every transfer.

• Focus: Transaction flow and behavior, not user identity.
• Method: Continuous monitoring of on-chain activity against risk indicators.
• Output: Risk scores, alerts, and compliance reports for flagged transactions.

The Travel Rule is a global anti-money laundering standard requiring Virtual Asset Service Providers (VASPs) to share originator and beneficiary information for cross-border transactions above a certain threshold. A Regulatory Query Interface is critical for its implementation, enabling secure, standardized data exchange between compliant entities.

• Requirement: Share sender (Originator) and receiver (Beneficiary) PII for transfers.
• Threshold: Typically applied to transactions over $/€1,000.
• Challenge: Balancing compliance with privacy and interoperability across jurisdictions.

A VASP is any business that provides services related to virtual assets for or on behalf of another person, as defined by the Financial Action Task Force (FATF). This includes exchanges, custodial wallets, and some DeFi protocols. VASPs are the primary entities obligated to implement compliance tools like a Regulatory Query Interface.

• Examples: Centralized exchanges (Coinbase, Binance), OTC desks, custodians.
• Obligation: Must perform KYC, KYT, and adhere to the Travel Rule.
• Scope: The regulatory definition is expanding to cover more decentralized finance activities.

On-chain analytics is the practice of collecting, aggregating, and interpreting publicly available blockchain data to derive insights. While a Regulatory Query Interface requests specific compliance data, analytics platforms provide the underlying intelligence—such as wallet clustering, fund flow tracing, and risk heuristics—that powers those queries.

• Data Source: Public blockchain ledgers (transactions, addresses, smart contracts).
• Tools: Address labeling, transaction graph analysis, pattern detection.
• Providers: Chainalysis, TRM Labs, Elliptic provide the data sets that feed into RQI systems.

A Decentralized Identifier (DID) is a verifiable, self-sovereign digital identity standard (W3C) that is controlled by the user, not a central authority. In regulatory contexts, DIDs can be used within a Regulatory Query Interface to allow users to cryptographically prove claims (like KYC status) without revealing all their personal data, enabling privacy-preserving compliance.

• Standard: W3C Verifiable Credentials data model.
• Use Case: Portable, user-controlled KYC attestations for DeFi or cross-VASP transfers.
• Benefit: Minimizes data exposure while providing cryptographic proof of compliance.

Sanctions screening is the automated process of checking parties (individuals, entities, addresses) against official government sanctions lists, such as the OFAC SDN list. A core function of a Regulatory Query Interface is to provide a real-time API for developers to screen wallet addresses and transaction counterparties against these lists to prevent prohibited interactions.

• Lists: OFAC (US), EU Consolidated List, UN Security Council lists.
• Matching: Uses fuzzy logic and heuristics to identify potential matches to listed addresses.
• Requirement: Mandatory for regulated VASPs operating in relevant jurisdictions.