The U.S. Department of the Treasury has called for comment on the use of “innovative or novel” measures to “detect and mitigate” the illicit use of cryptocurrencies.
Published in the Federal Register, the request for comment expires on October 17 and aims to fulfill the provisions of the recently passed GENIUS Act, especially those pertaining to the management of financial risk and to compliance with the Bank Secrecy Act.
The Treasury aims to focus on four main areas: application program interfaces (APIs), AI, digital ID verification, and blockchain monitoring.
It’s therefore seeking input on how such solutions could enhance the ability of regulated institutions to detect illegal crypto-related activity, as well as on any privacy risks involved in monitoring transactions.
The Treasury will use responses to compile a report which it will then send to the Senate Committee on Banking, Housing, and Urban Affairs of the Senate and also the House Committee on Financial Services, who will then formulate relevant guidance and legislative proposals.
Given the focus on detecting and preventing illicit cryptocurrency flows, there’s been some concern that proposals could have a negative impact on privacy. But experts working within the industry are optimistic that a compromise between decentralization and compliance can be reached.
“Blockchain platforms can implement KYC/AML without undermining user privacy, which is a necessary balance DeFi must strike to mature,” Katie Evans, the Head of Business Development at DeFi infrastructure provider Swarm, told Decrypt.
KYC refers to know your customer, or the requirement that banks, traditional financial institutions, and a growing number of crypto firms collect personal information about their customers. AML, or anti-money laundering, refers to safeguards these same institutions use to detect money laundering.
Evans added that Swarm has been balancing privacy and transparency for several years now by using a combination of zero-knowledge proofs and smart contracts to conduct compliance checks without “unnecessary” sharing of data.
“Our tokenized stocks run on public, permissionless blockchains, so users still benefit from decentralization’s core promises: transparency, self-custody, and 24/7 access,” she said. “At the same time, we’ve built in KYC/AML access controls to ensure eligible participants can issue and redeem these assets.”
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Other experts agree that zero-knowledge proofs will play a key role in maintaining compliance in a way that respects privacy. Harry Halpin, CEO and co-founder of decentralized VPN provider Nym, warned against the collection of “excessive” KYC and AML data.
