Being blacklisted is the obvious risk, but compliance teams look at something subtler: proximity. Even if your address is clean, receiving funds from an address that's "close" to blacklisted funds can trigger compliance reviews, exchange holds, or worse. Here's how it works.
What is proximity?
Proximity measures how many transactions separate your address from a blacklisted address. Think of it like degrees of separation:
The key insight: you might be 1 hop away from a blacklisted address and not know it. If someone sends you tokens, and their address gets blacklisted tomorrow, your proximity score changes retroactively.
Counting hops
Hops are counted by following the flow of funds:
0 Hops (Direct)
Your address IS the blacklisted address. Funds are frozen.
1 Hop
You received funds directly from a blacklisted address.
2 Hops
You received funds from someone who received from a blacklisted address.
3+ Hops
Multiple intermediaries between you and the blacklisted address.
Risk levels by proximity
Different hop counts carry different risk profiles:
| Proximity | Risk Level | Typical Response |
|---|---|---|
| 0 Hops | Critical | Funds frozen. Cannot transfer. Potential legal investigation. |
| 1 Hop | High | Exchange account holds. Enhanced due diligence. Possible SAR filing. |
| 2 Hops | Medium | Flagged for review. May require source of funds documentation. |
| 3+ Hops | Low | Generally acceptable. Some conservative platforms may still flag. |
Amount matters too
Receiving $10 from a 1-hop address is different from receiving $100,000. Most compliance systems consider both proximity AND amount when assessing risk. A small incidental transfer may be overlooked; a large one won't be.
Why compliance teams care
Proximity analysis exists because criminals try to "clean" funds by moving them through multiple wallets. By tracking hops, compliance teams can:
Trace fund flows
Follow where stolen or illicit funds ended up, even after multiple transfers.
Identify intermediaries
Find addresses that may be knowingly helping launder funds (mixing services, nested exchanges).
Protect platforms
Exchanges must demonstrate they're not processing criminal funds, even indirectly.
Regulatory compliance
AML regulations increasingly require looking beyond direct transactions.
Protecting yourself
You can't always prevent receiving "tainted" funds, but you can minimize risk:
Check addresses before transacting
Before accepting large payments, check the sender's address for blacklist status and proximity. If they're 1 hop from blacklisted funds, you'll become 2 hops.
Use fresh addresses for large receipts
Keep your main holdings in addresses that only receive from known, trusted sources. Use separate addresses for peer-to-peer trades or unknown counterparties.
Document your transactions
Keep records of who you transacted with and why. If flagged by an exchange, documentation proving legitimate business purpose can help resolve issues.
Monitor ongoing exposure
Addresses can be blacklisted retroactively. Set up monitoring to alert you if any of your past counterparties become blacklisted.