Coinbase is urging the U.S. Department of the Treasury to abandon its outdated anti-money laundering (AML) regulations, which the exchange describes as ineffective in the modern digital economy. Instead, the company is advocating for a transformation of compliance infrastructure through the integration of advanced technologies like artificial intelligence, blockchain analytics, and zero-knowledge proofs.
In a formal response to the Treasury’s request for public input on combating illicit finance in the digital asset space, Coinbase emphasized that current regulations—many rooted in the decades-old Bank Secrecy Act—are no longer capable of addressing the complexities and threats posed by modern financial crimes. Paul Grewal, Coinbase’s Chief Legal Officer, framed the issue succinctly: “When bad actors advance their methods, the tools used by defenders must evolve too.”
The Treasury’s request for comment appeared in the Federal Register in August, prompting Coinbase to outline a vision for a tech-forward compliance framework. The company’s proposals focus on three major upgrades: formal recognition of blockchain analytics tools, legal safe harbors for the responsible use of AI in AML monitoring, and regulatory support for zero-knowledge proofs that can enhance privacy while maintaining compliance.
Coinbase argues that these technologies offer a more effective and efficient approach to monitoring illicit activity without infringing on user privacy or stifling innovation. Blockchain analytics, for example, allows for the real-time tracking of suspicious transactions across pseudonymous networks, providing more insight than traditional banking monitoring tools. Meanwhile, AI models could help compliance teams flag unusual behavior with greater accuracy and less human bias.
Zero-knowledge proofs—a cryptographic method that allows one party to prove to another that a statement is true without revealing the data behind it—are particularly promising, according to Coinbase. These proofs could be used to validate that a user meets regulatory standards (such as being over 18 years old or not being on a sanctions list) without exposing their entire identity or financial history.
Coinbase’s call to modernize AML compliance is not just about improving effectiveness—it’s also about ensuring that U.S. regulations keep pace with global innovation. The crypto exchange warns that clinging to outdated frameworks risks pushing blockchain development offshore, which could diminish U.S. influence in shaping the future of digital finance.
The company is also advocating for the creation of regulatory sandboxes to test these new technologies in controlled environments. Such initiatives would allow both regulators and industry players to assess the real-world impact of tools like AI and zero-knowledge proofs before they are broadly implemented.
Furthermore, Coinbase is pushing for clearer guidelines around the use of decentralized finance (DeFi) platforms. The current legal ambiguity surrounding DeFi, where protocols often operate without a central authority, presents challenges for traditional AML enforcement. By incorporating blockchain analytics and smart contract auditing in compliance strategies, regulators could more effectively monitor DeFi ecosystems without stifling their innovation potential.
The crypto exchange also emphasizes the importance of private-public collaboration. Coinbase suggests that the Treasury and the broader financial regulatory community should work closely with industry stakeholders to co-develop standards and share best practices, especially as the tools and tactics used by criminals evolve rapidly.
In addition, Coinbase proposes the establishment of a centralized digital asset compliance registry. This registry would allow legitimate crypto businesses to voluntarily opt in and share verified information with regulators, making it easier to distinguish between compliant actors and bad faith operators.
The letter also highlights the potential of machine learning to identify previously unknown patterns of financial crime. Unlike traditional rule-based systems that rely on predefined red flags, machine learning algorithms can adapt and evolve by analyzing large datasets, potentially uncovering new schemes before they cause significant damage.
Coinbase’s stance reflects a broader industry trend: the push for smarter regulation that leverages the strengths of emerging technologies rather than fighting against them. As digital currencies continue to grow in adoption and utility, the need for a modern compliance framework becomes increasingly urgent.
Ultimately, the exchange’s message to the Treasury is clear: the tools of the past are insufficient for the financial threats of the future. Innovation in regulation must match the pace of innovation in criminal tactics—and more importantly, in the legitimate use of technology. Coinbase is positioning itself as a partner in that evolution, urging regulators to seize the opportunity for reform before technological stagnation leaves the system vulnerable.
In summary, Coinbase’s appeal to the U.S. Treasury underscores the urgent need to update antiquated regulatory approaches in favor of smarter, tech-driven solutions that serve both security and innovation in the digital asset space.