Coinbase Tells US Treasury Department Old AML Rules Are ‘Broken’, Urges Tech Fixes for Crypto Crime

Coinbase has urged the US Treasury Department to scrap decades-old anti-money laundering regulations, calling them outdated, and to adopt AI and zero-knowledge proofs to combat financial crime in digital assets.

The crypto exchange sent a letter to the Treasury Department Friday, in response to the agency’s request for comment on innovative methods to detect illegal activities involving digital assets.

“As the bad guys innovate in financial crime, the good guys need innovation to keep pace,” said Coinbase Chief Legal Officer Paul Grewal tweeted Monday..

Initially treasury the request published in the Federal Register in August.

In one blog post Published in August, Grewal wrote that “the Bank Secrecy Act is broken. Technology can fix it,” and said the current compliance system is “rooted in decades-old requirements that reflect paper-based protocols designed for a financial system” where money transfers take days.

The exchange has now called for the creation of safe harbors under the Bank Secrecy Act for companies that responsibly deploy AI to improve compliance programs, with terms that focus on governance and results rather than enforcing a one-size-fits-all model.

Federico Fabiano, Head of Legal & Compliance at Hex Trust, explains Declutter that “the era of ‘check-the-box’ compliance must evolve,” saying that reliance on existing laws may no longer be sustainable.

“We must collectively drive the integration of transformative tools like AI, which, powered by the immutable transparency of the blockchain, can finally move AML beyond the problem of low-value, static data,” Fabiano said, calling the evolution “an opportunity, not a constraint” that is essential to securing a credible, compliant financial ecosystem.

Coinbase says high compliance costs “create formidable barriers to entry for smaller financial services firms, including fintech startups,” and are often passed on to customers through higher banking fees and denials of financial services, especially for low-income customers.

Identify the problem

Coinbase also urged the Treasury Department to issue guidance that clearly recognizes API-driven compliance technologies, including outlining acceptable use cases, data privacy requirements, and interoperability standards.

“The US must take action on this now,” Grewal tweeted.

The letter says current rules force Americans to perform new KYC checks on every financial account, sharing their data “with dozens of companies” that must keep it for years, creating “honeypots for criminals.”

It calls for updating the Bank Secrecy Act to recognize decentralized IDs and zero-knowledge proofs as valid methods of identity verification.

Coinbase has further requested that the Treasury Department publish guidelines that explicitly recognize Know-Your-Transaction screening blockchain analytics clustering as more effective compliance methods.

Coinbase said financial institutions file more than 25 million reports with FinCEN each year, mostly on legal activity, but that “the vast majority never result in a follow-up,” and despite a 2020 law to modernize the system, “little or no progress has been made.”

Also the privacy advocacy group Coin Center submitted a responsewith executive director Peter Van Valkenburgh warning that stablecoins on public chains with traditional AML requirements could create a “CBDC-style panopticon.”

The Treasury Department will compile the answers into a congressional report for the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services, which will then formulate relevant guidance and legislative proposals.