Coinbase Calls on U.S. Treasury to Modernize Outdated AML Rules for the Digital Era

Coinbase has urged the U.S. Department of the Treasury to modernize the nation’s anti-money-laundering (AML) frameworks, arguing that existing rules no longer reflect the realities of a digital financial ecosystem. In its October 2025 response to the Treasury’s Request for Comment on Innovative Methods to Detect Illicit Activity in Digital Assets, the exchange positioned itself at the heart of an evolving debate over how regulators and the crypto industry can collaborate to strengthen financial integrity. What began as a consultation has evolved into a defining moment in the intersection of policy, technology, and compliance.

Coinbase’s submission delivers a clear message: current AML regulations—crafted decades ago for a paper-based banking system—are incapable of addressing a borderless economy where value moves across multiple ledgers in milliseconds. The company’s stance reflects a broader frustration within the financial sector, where frameworks such as the Bank Secrecy Act have transformed compliance into a resource-heavy, often ineffective process. Institutions are generating millions of reports, yet enforcement outcomes remain limited.

By reframing the conversation around modernization, Coinbase has positioned itself not only as a stakeholder but as a strategic voice in shaping the next generation of AML policy. The exchange’s advocacy is both a bid for regulatory innovation and a reflection of the competitive dynamics at play: the rules that emerge from this debate will define which companies thrive in the digital asset space and which fail to meet the rising bar of compliance.

The Treasury’s consultation aligns with the broader U.S. effort to update financial crime laws under the Anti-Money Laundering Act of 2020. At the core of the discussion is whether blockchain transparency, combined with artificial intelligence and decentralized identity systems, can outperform the current compliance model built around data hoarding and retrospective reporting. Coinbase’s answer is unequivocal: modernization is essential. Without it, regulators and the industry will remain perpetually reactive, while illicit actors exploit fragmented oversight abroad.

In its response, Coinbase dissects the mechanics of crypto-related money laundering, arguing that while the methods mirror traditional financial crime, the speed and scale of digital transactions create unique vulnerabilities. The greatest weakness lies not within blockchain technology itself—where transactions are permanently recorded—but at the points where digital value enters or exits the traditional financial system. These conversion junctures are where illicit proceeds can be disguised, legitimized, or withdrawn.

The exchange identifies non-compliant digital asset service providers as the key enablers of laundering activity. Operating in loosely regulated jurisdictions, these firms offer minimal know-your-customer (KYC) checks and limited cooperation with authorities. Their appeal lies in convenience and anonymity. Funds flow through such entities, are mixed or “tumbled,” and later reappear on regulated platforms appearing clean. The phenomenon of jurisdictional arbitrage—shifting operations to countries with weaker oversight—compounds the problem.

Recent U.S. enforcement actions against offshore exchanges have underscored the challenge. The Treasury and related agencies have already designated several foreign intermediaries as money-laundering concerns under existing authorities, confirming that fragmented global standards continue to undermine collective enforcement. Coinbase’s response implicitly acknowledges this reality, arguing that consistent international regulation is vital to make enforcement preventive rather than merely punitive.

The company describes a paradox at the heart of crypto AML: the technology offers unparalleled transparency, yet inconsistent regulation enables opacity. Coinbase asserts that innovation can resolve this tension. Through a compliance infrastructure that integrates real-time blockchain monitoring, off-chain data feeds, and machine learning analytics, the exchange claims to identify and block suspicious addresses tied to ransomware, sanctions evasion, or darknet activity before transactions finalize. This, the company argues, is the model regulators should encourage—not restrict.

But structural gaps persist. As Coinbase notes, money laundering flourishes wherever enforcement jurisdiction ends. Compliant exchanges may screen high-risk activity, but unregulated counterparts continue to serve as open conduits for illicit proceeds from cybercrime and corruption. For this reason, Coinbase’s push for AML reform aligns closely with broader global priorities: closing regulatory loopholes to prevent bad actors from exploiting inconsistent oversight.

At the center of the company’s argument is a simple premise: outdated rules have become both a compliance burden and a systemic risk. The Bank Secrecy Act’s legacy model of bulk data collection exposes financial institutions to cybersecurity threats while yielding limited investigative value. Coinbase proposes an alternative built on “intelligent, risk-based detection” driven by emerging technologies. APIs, artificial intelligence, and blockchain analytics would replace manual reporting with continuous, secure information exchange.

Under this vision, APIs allow institutions to share compliance data in real time, minimizing errors and redundancies. AI models detect complex behavioral patterns and hidden typologies that static systems miss, while blockchain analytics turn transaction ledgers into dynamic investigative maps capable of tracing illicit flows across networks. Coinbase also advocates for the recognition of decentralized identity systems—leveraging zero-knowledge proofs and cryptographic attestations—as valid forms of customer verification. This approach, it argues, would eliminate redundant KYC processes, reduce privacy risks, and enhance verification accuracy.

The company outlines a series of safeguards to accompany these innovations: encryption standards, access controls, vendor audits, and transparent governance frameworks. It also urges the creation of regulatory “safe harbor” provisions within the Bank Secrecy Act to enable experimentation without fear of punitive repercussions. This proposal mirrors global trends toward regulatory sandboxes designed to balance innovation with supervision.

If implemented, these reforms could fundamentally reshape the relationship between regulators and financial institutions. Rather than filing static reports after transactions, firms would feed encrypted, standardized data streams into shared monitoring systems. Regulators would analyze these data flows holistically, identifying money-laundering patterns earlier in the cycle. The result, Coinbase argues, would be a living, intelligence-driven AML system grounded in collaboration rather than paperwork.

This debate also exposes a philosophical rift between regulators and innovators. Traditional oversight favors procedural compliance, while technology companies like Coinbase emphasize outcomes. The exchange’s position is that success should be measured “not by the number of reports filed, but by the quality of actionable intelligence produced.” Artificial intelligence plays a central role in this vision. Coinbase already deploys AI models for transaction monitoring, market surveillance, and customer risk assessment, continuously refining their accuracy through machine learning.

Yet the company also acknowledges the governance challenges of AI. Inconsistent standards could lead to bias, opacity, or overreliance on algorithms. To address this, Coinbase calls for principles-based supervision emphasizing human oversight, transparency, and regular model testing instead of rigid technical prescriptions.

Another cornerstone of Coinbase’s proposal is digital identity reform. Traditional KYC methods require every institution to store personal documents separately, increasing data exposure. Decentralized identity frameworks would allow individuals to maintain verifiable credentials that can be securely shared across institutions without repeatedly disclosing private information. In an AML context, this could streamline onboarding and improve accuracy while preserving privacy.

Ultimately, Coinbase envisions a compliance ecosystem where blockchain analytics, AI, and decentralized identity converge into a single, intelligent architecture. In such a model, suspicious activity would be detected through network analysis rather than mass data reporting. Regulators could access encrypted insights on demand, allowing for earlier and more precise intervention.

The proposal also challenges regulators to innovate internally. Coinbase suggests that supervisory agencies themselves deploy AI tools to analyze Suspicious Activity Reports and share feedback with institutions. This two-way collaboration would replace the current static reporting structure with a dynamic feedback loop, strengthening model performance and regulatory responsiveness.

On a global scale, the Coinbase-Treasury dialogue reflects an accelerating shift toward coordinated AML enforcement. Criminal networks exploit regulatory mismatches across borders, making harmonization under frameworks such as the Financial Action Task Force essential. Coinbase explicitly supports aligning U.S. policy with international standards to eliminate regulatory arbitrage and ensure uniform obligations for all digital asset service providers.

However, achieving harmonization remains a challenge amid differing levels of regulatory maturity worldwide. While some jurisdictions have implemented comprehensive licensing systems, others remain underdeveloped. This imbalance allows laundering networks to migrate rapidly between regions. The U.S. has countered through targeted designations under Section 311 of the PATRIOT Act, labeling certain foreign institutions as primary money-laundering concerns. Coinbase endorses this strategy but insists that enforcement must be paired with modernization to prevent displacement of illicit activity rather than its relocation.

The exchange further highlights the privacy risks inherent in the current data-heavy regime. By compelling institutions to collect massive quantities of personal information, existing AML laws inadvertently heighten the risk of data breaches and misuse. Modernization, Coinbase argues, would not only improve efficiency but also rebuild public trust by introducing privacy-preserving compliance methods that authenticate legitimacy without overexposure.

For policymakers, the challenge lies in balancing innovation with authority. Coinbase’s proposals—ranging from regulatory sandboxes and safe-harbor protections to standardized APIs and cross-border data-sharing agreements—offer a detailed roadmap for reform. Together, these measures aim to align technological progress with effective oversight.

The company’s engagement with the Treasury underscores the maturing relationship between the crypto industry and regulators. What once was an adversarial dynamic has evolved into pragmatic collaboration. Coinbase’s advocacy signals both a recognition of institutional responsibility and a desire to shape the regulatory infrastructure that will define the next phase of global financial integrity.

If adopted, the reforms proposed by Coinbase could establish a precedent for integrating advanced technologies into AML oversight frameworks worldwide. With Europe, Asia, and other regions experimenting with AI-driven and blockchain-based supervision, the U.S. dialogue stands to influence the future of anti-money-laundering innovation on a global scale.

By fLEXI tEAM