Coinbase is urging the U.S. Treasury Department to replace its half-century-old anti-money laundering regulations with a new framework focused on technological innovation to more effectively combat financial crime in the digital era.
The international cryptocurrency exchange argues that the existing rules, established over 50 years ago, are obsolete and ineffective against modern digital financial challenges. Coinbase submitted a 30-page response to a Treasury request for comments on “Innovative methods to detect illicit activity related to digital assets.”
The company stressed that technological innovation, rather than stricter regulations, should be the primary tool to fight financial crime. Paul Grewal, Coinbase’s chief legal officer, stated that innovation is crucial for legitimate actors to keep pace when criminals innovate.
Coinbase criticized the Bank Secrecy Act of 1970, which mandates financial institutions report suspicious transactions. It contends these rules expose users’ personal data without meaningfully curbing criminal operations.
The current regulatory framework creates an “overload of low-value reports” that inundate regulators. It also forces companies to store vast amounts of sensitive customer information unnecessarily.
To modernize the system, Coinbase proposed implementing “safe harbors” or regulatory sandboxes. These would allow companies to test artificial intelligence (AI) and API-based tools for detecting illicit activities.
The firm also advocated for recognizing decentralized identities (DID) and zero-knowledge proofs (ZKP) as valid customer verification methods. This approach, it said, could enhance privacy without weakening financial controls.
Coinbase recommended supporting a “know your transaction” (KYT) approach through blockchain analysis. It believes this method is more efficient for tracking suspicious financial flows than traditional banking practices.
The company also called for stronger public-private cooperation through “regulatory sandboxes.” These controlled environments would allow businesses and agencies to experiment with new compliance models before widespread implementation.
Coinbase emphasized that reforms should prioritize measurable outcomes, such as a real reduction in financial crime, over rigid mandates or the sheer volume of reports submitted. The company stated a need for a system that prioritizes quality and innovation over bureaucracy.
Coinbase’s proposals come as the U.S. Congress debates the future of cryptocurrency oversight. Democratic lawmakers on the Senate Banking Committee are circulating a draft proposal aimed at curbing illicit activity in decentralized finance (DeFi).
However, this draft has drawn criticism from Republican lawmakers and industry leaders. They warn it could effectively prohibit the development of DeFi applications and non-custodial wallets.
Coinbase aims to position its document as a balanced approach between technological innovation and regulatory compliance. This intervention occurs as Washington redefines its stance on the crypto ecosystem and its implications for national financial security.