Coinbase Advocates for Modernization of AML Regulations
In a significant move, Coinbase has urged the U.S. Treasury Department to modernize anti-money laundering (AML) regulations that they believe are outdated. The advocacy stems from the exchange’s recent submission to the Treasury, emphasizing the need to adopt advanced technologies such as artificial intelligence (AI) and zero-knowledge proofs to combat financial crimes linked to digital assets. This correspondence was part of the agency’s solicitation for public input about innovative strategies to tackle illicit activities in the digital financial sphere.
Urgency of Technological Advancements
Coinbase’s Chief Legal Officer, Paul Grewal, expressed the urgency of the situation on social media, highlighting that as criminals evolve their techniques, it’s imperative for the good actors in the finance space to leverage technological advancements to keep up. This sentiment was originally articulated in a blog post by Grewal, where he criticized the existing framework under the Bank Secrecy Act for being a relic of a bygone era dominated by paper-based methods, barely capable of addressing the modern financial landscape that requires quicker responses.
Proposed Regulatory Changes
Since the publication of the Treasury’s request in the Federal Register back in August, Coinbase has suggested creating regulatory safe harbors for companies that adopt AI in compliance processes, advocating for a governance model focusing on outcomes rather than a standard one-size-fits-all approach. Experts, including Federico Fabiano from Hex Trust, have echoed this sentiment, arguing that the traditional compliance mindset is insufficient in today’s rapidly changing environment, stressing the need for collaborative governance integrating revolutionary technologies like AI and the transparency of blockchain.
Concerns Over Compliance Costs
Coinbase has raised concerns over the burdensome compliance costs that disproportionately affect smaller financial service firms and fintech companies, stating that these expenses can lead to increased banking fees for customers and reduced access to financial services for economically disadvantaged individuals. They have called on the Treasury to clarify its stance on various compliance technologies that utilize APIs and to outline usage parameters and data privacy standards.
Call for KYC Protocol Updates
Furthermore, the letter highlighted the inefficiencies in the current KYC protocols, which compel individuals to undergo repetitive identity checks across multiple financial accounts, thereby multiplying the risk of data breaches. Coinbase has advocated for an update to the Bank Secrecy Act to incorporate decentralized identity systems and zero-knowledge proofs as legitimate forms of identity verification. They have also asked for the Treasury to formally recognize Know-Your-Transaction techniques and blockchain analytics as credible methods for compliance.
Critique of Current Reporting Practices
Despite financial institutions filing over 25 million reports annually to FinCEN—most of which concern legal activities—the efficacy of this reporting has been criticized, as few lead to actionable follow-ups. This lack of progress persists even after the introduction of modernization legislation in 2020. Privacy advocacy group Coin Center corroborated this discussion, cautioning that applying traditional AML rules to stablecoins, particularly those on public blockchains, could inadvertently result in a surveillance-heavy system akin to a central bank digital currency (CBDC).
Future Considerations
The responses received by the Treasury will be compiled into a report for consideration by congressional committees, which are tasked with shaping future guidance and legislative measures to reform the current financial compliance landscape.
