Coinbase Takes on U.S. Treasury: Time to Modernize Crypto Rules

Coinbase is pushing the U.S. Treasury Department to overhaul outdated anti-money-laundering (AML) regulations, arguing that decades-old rules are no longer suited to the digital finance era.

In a letter submitted Friday, the crypto exchange suggested leveraging artificial intelligence and zero-knowledge proofs to better detect illicit activity in digital assets.

Outdated Rules and High Compliance Costs

Paul Grewal, Coinbase’s Chief Legal Officer, emphasized the urgency of innovation in compliance, tweeting, “When bad guys innovate in financial crime, good guys need innovation to keep pace.” He previously described the Bank Secrecy Act as “broken,” rooted in paper-based processes designed for slower, traditional banking systems.

Coinbase’s proposal includes regulatory safe harbors for firms that responsibly deploy AI to improve compliance, with a focus on outcomes and governance rather than rigid one-size-fits-all rules. According to the exchange, existing AML rules create high compliance costs that disproportionately impact smaller fintech firms and can lead to higher fees or restricted access for everyday consumers, particularly those with lower incomes.

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Modern Tools for Identity Verification and Compliance

The letter also urges Treasury to formally recognize decentralized IDs and zero-knowledge proofs as valid identity-verification methods, alongside modern practices like Know-Your-Transaction screening and blockchain analytics clustering. Current rules, Coinbase notes, force repeated KYC checks and data sharing with multiple entities, creating long-term “honeypots” that could be exploited by criminals.

Experts in crypto compliance echo the call for modernization. Federico Fabiano, Head of Legal & Compliance at Hex Trust, called the reliance on static, “check-the-box” compliance outdated, describing AI and blockchain as tools that could transform AML enforcement into a more dynamic and effective system.

Privacy advocacy group Coin Center also submitted recommendations, warning that applying traditional AML rules to stablecoins on public chains could replicate a “CBDC-style panopticon,” eroding financial privacy.

Responses like Coinbase’s will be compiled by Treasury into a report for Congress, where the Senate Committee on Banking and the House Committee on Financial Services will use the input to inform future guidance and potential legislation.