Coinbase urges Treasury to adopt AI tools in crypto crime detection

• Coinbase proposes AI and blockchain tools to improve crime detection in crypto.
• The exchange urges safe harbors for firms using innovative compliance tech.
• Coinbase supports zero-knowledge proofs for secure customer verification.
• Regulatory sandboxes are suggested to test new models before rule changes.

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As U.S. regulators weigh new approaches to digital-asset oversight, Coinbase is pushing for technology-led reforms instead of tougher enforcement. In a formal response to the U.S. Treasury, the crypto exchange is urging updates to outdated anti-money-laundering rules. The company argues that smarter tools like AI and blockchain analytics can better detect illicit activity without compromising consumer privacy or stifling innovation.

Coinbase Pushes for Modernized AML Rules

Coinbase submitted a 30-page response to the Treasury Department’s request for input on detecting illegal activity involving digital assets. In the document, the exchange criticized the current framework based on the Bank Secrecy Act (BSA), which was enacted in 1970. The company said the law is no longer effective in the digital era.

According to Coinbase Chief Legal Officer Paul Grewal, the approach to financial crime must evolve. “When bad guys innovate in financial crime, good guys need innovation to keep pace,” Grewal wrote in a post on X. The company said current rules often produce low-value reports while exposing personal data and increasing compliance costs.

Coinbase is asking regulators to allow more flexibility for firms using new technologies. The company says this shift would improve monitoring and help firms respond faster to threats, without needing to collect unnecessary customer information.

Use of AI, Zero-Knowledge Proofs, and Blockchain Analytics

In its filing, Coinbase recommended creating regulatory “safe harbors” for companies that adopt AI, API tools, and blockchain-based analytics. These tools, the exchange says, can detect suspicious patterns in real time and are more accurate than traditional systems.

The firm also supports the use of decentralized IDs and zero-knowledge proofs for identity verification. These technologies can confirm identities without revealing full personal details, reducing the risks of data leaks and breaches.

Coinbase also advocated for know-your-transaction (KYT) models, which track specific digital asset flows on public blockchains. This, the company said, offers more insight than conventional know-your-customer (KYC) approaches. The filing explained that analyzing transactions on-chain allows companies to flag potential criminal behavior more effectively.

Regulatory Sandboxes and Outcome-Based Compliance

Coinbase is calling for regulatory sandboxes that allow firms and regulators to test new compliance models before new rules are finalized. These programs would let companies trial advanced monitoring systems in a controlled setting while working alongside government agencies.

The exchange also suggested shifting the focus from strict rule-following to measurable results. It argued that regulators should assess whether a firm is effectively stopping financial crime, not just whether it is following every procedural step. This approach, Coinbase says, would free up resources and allow companies to invest more in real-time detection systems.

The exchange emphasized that forcing companies to submit large amounts of data often overwhelms regulators and does little to stop bad actors. Instead, smarter tools and shared testing environments could lead to better outcomes for all parties.

Ongoing Debate in Washington Over Crypto Oversight

Coinbase’s proposal comes amid growing discussion in Congress about digital asset regulations. Recently, Senate Banking Committee Democrats circulated a draft plan to address illegal activity in decentralized finance (DeFi). The proposal would expand anti-money-laundering rules and reporting obligations to cover DeFi platforms and wallets.

The draft was met with concern from some Republican lawmakers and crypto industry leaders. Critics argued that the proposal could harm innovation and limit the development of open financial tools. Some said the plan would be difficult to enforce without affecting legal use of blockchain systems.

Coinbase’s filing contrasts with the Senate’s approach. The exchange believes innovation and public-private collaboration offer a more effective path forward. The company continues to urge the Treasury to support new technologies in compliance efforts, rather than relying on outdated and burdensome systems.

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