Coinbase is urging the U.S. Department of the Treasury to overhaul outdated anti-money-laundering frameworks that no longer fit the realities of a digital financial system. The exchange’s October 2025 response to the Treasury’s Request for Comment on Innovative Methods to Detect Illicit Activity in Digital Assets marks a turning point in the dialogue between regulators and the crypto industry. What began as a consultation has evolved into a revealing case study of how policy and technology are colliding in the fight against money laundering.

Crypto money laundering challenges and regulatory evolution

The submission makes one thing clear: current AML laws, built for a world of slow paper-based transfers, cannot effectively police a borderless economy where transactions occur across multiple ledgers in milliseconds. Coinbase’s position reflects an underlying frustration shared by much of the financial sector: that decades-old statutes such as the Bank Secrecy Act and its reporting mechanisms have turned compliance into a costly and often inefficient exercise, generating enormous volumes of reports that rarely lead to enforcement outcomes.

By framing the debate around modernization, Coinbase has effectively placed itself at the center of an emerging regulatory realignment. It is both a participant in and a subject of enforcement scrutiny. The company’s call for reform is as much about strategic positioning as it is about compliance innovation. Behind the diplomatic tone of its letter lies a growing awareness that the next wave of AML policy will determine which actors dominate the digital asset market — and which ones are forced out of it.

The Treasury’s consultation represents a wider U.S. government effort to adapt existing legislation to new technologies under the Anti-Money Laundering Act of 2020 and related frameworks. The central issue is whether blockchain transparency, when combined with artificial intelligence and decentralized identity systems, can genuinely outperform the current model based on mass data collection and post-transaction reporting. Coinbase’s response suggests it can, and that failing to evolve the rules will leave both regulators and industry chasing shadows while criminals exploit regulatory gaps abroad.

The anatomy of crypto money laundering

The exchange’s response to the Treasury outlines how laundering within the crypto ecosystem mirrors traditional financial crime but operates with greater velocity and opacity. The real vulnerability lies not in the blockchain itself — where every transaction is permanently recorded — but in the points where digital value intersects with the conventional financial system. These conversion points are where illicit proceeds can be obscured, legitimized, or withdrawn.

Coinbase points to non-compliant digital asset service providers as the main enablers of laundering. These entities, often based in permissive jurisdictions, offer minimal know-your-customer checks and limited cooperation with authorities. Their business model relies on attracting customers who prioritize convenience and anonymity over compliance. Funds move through these exchanges, are mixed, and then reappear on regulated platforms once they appear “clean.” The practice of jurisdictional arbitrage — locating operations in countries with weak supervision — amplifies the challenge.

This is not a theoretical concern. The U.S. government has already acted against several foreign exchanges and intermediaries under existing AML authorities, designating certain firms as money-laundering concerns. Such actions underline a reality the Coinbase document indirectly acknowledges: that without consistent global standards, enforcement will always be reactive rather than preventive.

Coinbase’s submission identifies two contrasting forces shaping the laundering landscape. On one hand, blockchain analytics and transaction-monitoring tools provide unprecedented visibility into financial flows. On the other, fragmented regulatory frameworks allow criminals to bypass the very systems designed to detect them. The result is a paradox — technical transparency constrained by legal inconsistency.

The company’s position is that technology itself can close this gap. Through its internal compliance architecture, Coinbase uses real-time monitoring tools that integrate on-chain and off-chain data, supported by APIs and machine learning models. Suspicious addresses linked to ransomware, sanctions violations, or darknet markets can be identified and blocked before transactions settle. This proactive model, Coinbase argues, should guide future regulation rather than be hindered by it.

However, the larger systemic problem persists. Money laundering thrives where enforcement stops at the border. While compliant exchanges filter high-risk activity, non-compliant ones remain open channels for illicit proceeds from cybercrime, scams, and corruption. Coinbase’s insistence on modernizing AML frameworks is therefore not only self-serving but strategically aligned with global enforcement priorities: to make it impossible for criminals to exploit regulatory fragmentation.

Innovation as a compliance defense

Central to Coinbase’s argument is that outdated rules have become both a security risk and an obstacle to effective supervision. The Bank Secrecy Act, conceived in the 1970s, requires institutions to collect and retain vast amounts of personal data. This model, while well-intentioned, creates privacy and cybersecurity vulnerabilities by turning financial institutions into warehouses of sensitive information. It also generates millions of reports, the majority of which have little investigative value.

Coinbase proposes a transition from bulk data reporting to intelligent risk-based detection using emerging technologies. Application Programming Interfaces, artificial intelligence, and blockchain analytics form the backbone of this vision. APIs enable regulated entities to exchange compliance data in real time, reducing manual processes and false positives. AI algorithms analyze behavioral patterns and detect complex typologies that traditional systems miss. Blockchain analytics transform transparent ledgers into investigative maps where illicit networks can be traced from origin to destination.

The company further advocates for the recognition of decentralized identity mechanisms, including zero-knowledge proofs, as acceptable methods of customer verification. Under this model, an individual’s identity could be verified once by a trusted entity and reused securely across institutions, eliminating repetitive know-your-customer procedures and minimizing the exposure of personal data. The approach would replace duplication with verification integrity, simultaneously reducing compliance costs and improving AML outcomes.

Coinbase’s submission to the Treasury outlines specific safeguards for these technologies: encryption, layered access control, vendor audits, and transparent governance. The firm also calls for regulatory safe-harbor provisions under the Bank Secrecy Act to encourage experimentation without fear of punitive action. This mirrors a broader policy trend across jurisdictions, where sandbox environments are used to balance innovation with oversight.

Yet the implications go beyond efficiency. If implemented, these reforms could redefine the relationship between financial institutions and regulators. Instead of sending static reports after transactions occur, institutions would feed encrypted, standardized data streams into collaborative monitoring systems. Regulators would analyze patterns across the ecosystem rather than individual institutions, identifying laundering activity earlier in its cycle. The outcome would be a dynamic AML regime driven by continuous intelligence rather than retrospective documentation.

Technology, trust, and the future of AML oversight

The case also exposes a philosophical divide between how governments and innovators view financial integrity. Regulators tend to rely on procedural certainty, while technology companies prioritize outcomes. Coinbase’s stance reflects the latter: success should be measured not by the number of reports filed, but by the quality of actionable intelligence produced.

Artificial intelligence plays a decisive role in this shift. Coinbase’s compliance framework already integrates AI models for transaction monitoring, market surveillance, and customer-risk assessment. These models process vast datasets, detect anomalies, and identify networks of related wallets. Machine learning systems can learn from confirmed cases of laundering, improving their predictive accuracy over time. This capacity to evolve, the company argues, makes AI superior to the rigid rule-based systems that dominate legacy compliance programs.

Nevertheless, the use of AI introduces its own governance challenges. Without clear standards, different institutions may apply models inconsistently, leading to bias or over-reliance on opaque algorithms. Coinbase therefore calls for principles-based supervision focused on human oversight, testing, and transparency rather than prescriptive technical rules. The objective is to ensure that AI enhances compliance rather than replaces accountability.

A parallel reform concerns digital identity. Traditional KYC processes require every financial institution to collect and store personal documents separately. Decentralized identity systems, built on blockchain and cryptographic attestations, would allow individuals to hold verifiable credentials without repeatedly disclosing private data. For anti-money-laundering purposes, this model could enable faster onboarding and more accurate risk assessments while minimizing exposure of sensitive information.

The broader vision proposed to the Treasury is an ecosystem where blockchain analytics, AI, and decentralized identity converge into a unified compliance architecture. In such a system, suspicious activity would be detected not through volume reporting but through network intelligence. Transactions involving high-risk entities could be blocked in real time, while regulators could access validated information without relying on mass data storage. This evolution would transform AML from a defensive function into an active intelligence capability.

The proposal also challenges regulators to adapt their own operations. Coinbase suggests that supervisory agencies themselves could deploy AI models to evaluate Suspicious Activity Reports, providing direct feedback to institutions. Such collaboration would replace the current one-way reporting flow with a feedback loop that improves model accuracy across the sector. If implemented, it could significantly increase the efficiency of both public and private AML efforts.

Global cooperation and the reform horizon

The Coinbase-Treasury exchange exemplifies how the AML landscape is shifting from national compliance to global coordination. Criminal networks exploit inconsistencies between jurisdictions; therefore, harmonized standards are no longer optional. Coinbase explicitly supports the alignment of U.S. policy with international frameworks under the Financial Action Task Force. The goal is to eliminate regulatory arbitrage by ensuring that digital asset service providers worldwide adhere to equivalent AML obligations.

However, harmonization is difficult when regulatory maturity varies. Some countries have adopted comprehensive licensing regimes for crypto exchanges, while others still lack enforcement capacity. This uneven terrain allows laundering networks to pivot quickly between jurisdictions. The U.S. has responded through targeted designations under Section 311 of the PATRIOT Act and related authorities, naming foreign institutions of primary money-laundering concern. Coinbase’s letter endorses this approach but emphasizes that enforcement must be coupled with modernization to prevent displacement rather than relocation of risk.

The exchange also highlights the privacy dilemma created by current laws. By requiring mass data collection, the existing system inadvertently endangers consumers through potential leaks and misuse. Modernization, therefore, is not merely about efficiency but about restoring trust in financial oversight. Blockchain-based identity verification and cryptographic proofs could enable privacy-preserving compliance — verifying legitimacy without revealing unnecessary information.

For policymakers, the challenge lies in crafting legislation that encourages technological innovation while preserving enforcement authority. Coinbase’s recommendations — regulatory sandboxes, safe-harbor provisions, standardized API protocols, and cross-border data-sharing agreements — offer a blueprint. These measures would allow regulators to test and scale advanced AML tools without undermining their mandates.

The exchange’s engagement with the Treasury also signals a maturing compliance culture within the digital asset sector. What began years ago as an adversarial relationship between regulators and crypto firms has evolved into pragmatic collaboration. Coinbase’s advocacy for reform reflects both a recognition of responsibility and an attempt to influence the standards that will define the next decade of financial crime prevention.

If adopted, the proposed reforms could set a precedent for integrating emerging technologies into regulatory frameworks worldwide. Other jurisdictions are already experimenting with similar initiatives, from Europe’s evolving AI and digital identity regulations to Asia’s blockchain-based supervisory systems. The outcome of the U.S. dialogue will likely shape the direction of AML innovation globally.

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Related Links

• U.S. Department of the Treasury – FinCEN
• Financial Crimes Enforcement Network – AMLA 2020
• Federal Register – Anti-Money Laundering Act Publications
• Financial Action Task Force – Virtual Asset Guidance
• U.S. Department of Justice – Money Laundering Section

Other FinCrime Central Articles About KYC Challenges for Crypto and DeFi

• Summer Series #2. Crypto Under Fire: Enforcement, Risks & Regulations
• Why DeFi and KYC Are Locked in a Never-Ending Conflict
• Blockchain Groups Challenge the IRS Over DeFi Regulations

Source: Coinbase (PDF)

Some of FinCrime Central’s articles may have been enriched or edited with the help of AI tools. It may contain unintentional errors.

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