Coinbase Tells US Treasury Old AML Rules Are ‘Broken’, Pushes Tech Fixes for Crypto Crimes

Coinbase has urged the US Treasury Department to eliminate decades-old anti-money laundering rules, calling them outdated, and adopt artificial intelligence and zero-knowledge proofs to combat financial crimes in digital assets.

The crypto exchange sent a letter to Treasury on Friday, responding to the agency’s request for comment on innovative methods for detecting illicit activities involving digital assets.

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

Treasury initially posted the request in the Federal Register in August.

in a blog post Posted in August, Grewal wrote that “The Bank Secrecy Act is broken. Technology can fix it,” saying the current compliance system is “based on decades-old requirements that reflect paper protocols designed for a financial system” where fund transfers take days.

The exchange has now called for regulatory safe harbors to be established under the Bank Secrecy Act for companies that responsibly deploy AI to improve compliance programs, with conditions that focus on governance and outcomes rather than forcing a one-size-fits-all model.

Federico Fabiano, Head of Legal Affairs and Compliance at Hex Trust, said Decipher that “the era of ‘tick-box’ compliance needs to evolve”, saying that reliance on existing laws may no longer be sustainable.

“We must collectively govern the integration of transformative tools like AI, which, powered by the immutable transparency of the blockchain, can finally move anti-money laundering beyond the problem of static and low-value data,” Fabiano said, calling the evolution “an opportunity, not a limitation” essential to ensuring a credible and compliant financial ecosystem.

Coinbase says high compliance costs pose “formidable barriers to entry for smaller financial services providers, including fintech startups,” and are often passed on to customers through higher banking fees and denial of financial services, particularly impacting low-income customers.

Identifying the problem

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

“America needs to move on this now,” Grewal tweeted.

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

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

Coinbase further requested that the Treasury publish guidance that explicitly recognizes Know-Your-Transaction assessment and block chain analysis grouping as more effective compliance methods.

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

Privacy advocacy group Coin Center also sent a replywith CEO Peter Van Valkenburgh warning that stablecoins on public chains with traditional anti-money laundering requirements could create a “CBDC-style panopticon.”

Treasury will compile the responses into a congressional report to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services, who will then formulate relevant legislative guidance and proposals.