On-Chain Analytics and AML — Where do we draw the line?

Been thinking a lot about the increasing sophistication of on-chain analytics tools, especially those being leveraged by regulators and larger institutions. For entities dealing directly with crypto, it's becoming standard practice to not just screen direct counterparties but to delve into the source of funds, often going several hops deep.

My question is, how far is too far? At what point does the expectation for identifying potential AML red flags in transaction history, particularly for inflows, become an undue burden, especially when considering the pseudo-anonymity of many chains? Is there a practical limit to the 'reasonable steps' we can take to trace funds back, or is the industry effectively being pushed towards a 'know your entire transaction history' standard? This isn't just about $BTC, it applies to any public ledger asset where fund flows can be mapped. It feels like a rapidly evolving area where the tech is outstripping some of the established regulatory frameworks, creating an ambiguous zone for compliance teams.