Rethinking AML: Industry Leaders Urge Treasury to Embrace AI and Blockchain Innovation

Coinbase has called on the U.S. Treasury Department to replace decades-old anti–money laundering (AML) regulations with modern, technology-driven frameworks that leverage artificial intelligence (AI) and zero-knowledge proofs (ZKPs) to combat financial crime in digital assets.

The crypto exchange submitted a detailed letter to the Treasury on Friday, responding to the agency’s public request for comment on innovative approaches to detect illicit activity in the digital asset space.

“When bad actors innovate, good actors must innovate faster,” wrote Paul Grewal, Coinbase’s Chief Legal Officer, in a post on X (formerly Twitter) Monday.

Rethinking the Bank Secrecy Act for the Digital Era

Coinbase’s submission builds on arguments Grewal made earlier this year in a blog post titled “The Bank Secrecy Act Is Broken. Technology Can Fix It.”

The post argued that today’s compliance system is still based on paper-era procedures that fail to reflect how money moves in a digital economy.

The company is now proposing the creation of regulatory safe harbors under the Bank Secrecy Act (BSA) for firms that responsibly deploy AI tools to enhance compliance. These safeguards, Coinbase said, should prioritize governance and measurable outcomes instead of imposing uniform, outdated reporting requirements.

“The high cost of compliance creates formidable barriers for smaller fintechs and startups,” the letter warned, adding that the burden is often passed on to consumers through higher fees or restricted access to banking services, especially for low-income customers.

From Static Data to Smart Compliance

Industry voices echoed Coinbase’s call for modernization. Federico Fabiano, Head of Legal and Compliance at Hex Trust, told Decrypt that traditional “check-the-box” compliance is no longer sufficient in a blockchain-powered world.

“We must collectively govern the integration of transformative tools like AI,” he said. “Combined with blockchain’s transparency, they can move AML beyond low-value, static data, turning evolution into opportunity rather than constraint.”

Coinbase also urged the Treasury to formally recognize API-driven compliance systems and issue guidance around data privacy, interoperability, and acceptable use cases. The firm argued that Americans are currently required to complete redundant KYC checks across multiple platforms, resulting in massive stores of personal data that become “honeypots for criminals.”

As a solution, the exchange suggested updating the Bank Secrecy Act to incorporate decentralized identities and zero-knowledge proofs as valid means of verifying identity without exposing sensitive user information.

Toward Smarter Oversight

Coinbase further recommended that the Treasury officially acknowledge Know-Your-Transaction (KYT) screening and blockchain clustering analytics as more efficient and effective alternatives to traditional monitoring methods.

According to the exchange, U.S. financial institutions collectively file over 25 million reports to FinCEN each year, yet most involve lawful activity and rarely trigger investigations. Despite legislation in 2020 intended to modernize the process, Coinbase said that “little meaningful progress has been made.”

Privacy advocates, meanwhile, have urged caution. Coin Center, a Washington-based nonprofit, warned in its own submission that extending traditional AML frameworks to stablecoins could lead to mass surveillance comparable to a government-issued digital currency.

Next Steps

The Treasury Department will compile feedback from Coinbase and other respondents into a report for Congress, to be reviewed by the Senate Banking Committee and the House Financial Services Committee.

The findings are expected to inform future guidance and legislative proposals aimed at modernizing financial crime prevention in the era of digital assets.