US Treasury is seeking “innovative methods” to detect illegal cryptographic activity

The US Treasury Department is seeking comment on the use of “innovative or novel” measures to “detect and mitigate” illegal use of cryptocurrencies.

Requests for comments, published in the Federal Register, expired on October 17th and aim to meet the recently passed provisions of the Genius Act, particularly those relating to financial risk management and compliance with banking secret laws.

The Ministry of Finance aims to focus on four key areas: Application Programming Interface (API), AI, Digital Identity Verification, and Blockchain Monitoring.

Therefore, we ask for opinions on how such solutions can enhance the ability of regulated agencies to detect illegal crypto-related activities, and the privacy risks associated with monitoring transactions.

The Treasury will use the response to compile the report, then dispatched to the Senate Committee on Banking, Housing and Urban Affairs, where the House Committee on Financial Services will develop relevant guidance and legislative proposals.

Compliance and privacy

Given its focus on detecting and preventing illegal cryptocurrency flows, there were concerns that the proposal could have a negative impact on privacy. However, experts working within the industry are optimistic that they can reach a compromise on decentralization and compliance.

“Blockchain platforms can implement KYC/AML without compromising user privacy. This is the required balance and must be attacked to mature.” Decryption.

KYC refers to knowing the requirements that customers, or banks, traditional financial institutions, and more and more crypto companies collect personal information about their customers. AML, or Money Laundering Anti-Money Laundering refers to protecting these institutions used by these same institutions to detect money laundering.

Evans added that SWARM has been balancing privacy and transparency for several years by using a combination of zero knowledge proof and smart contracts to carry out compliance checks without “unnecessary” sharing of data.

“Our tokenized inventory runs on public and authorized blockchains, so users benefit from the core promise of decentralisation, transparency, independence and 24/7 access,” she said. “At the same time, we have incorporated KYC/AML access controls to enable eligible participants to issue and redeem these assets.”

Other experts agree that zero knowledge proof plays an important role in maintaining compliance in a way that respects privacy. Harry Halpin, CEO and co-founder of decentralized VPN provider NYM, warned against a collection of “excessive” KYC and AML data.

“If the platform needs to run KYC/AML, you will need to use zero knowledge proofs like ALEO’s ZK-CREDS or anonymous credentials like NYM’s ZK-NYMS,” he said. Decryption.

One practice in NYM is to use credit cards to provide users with Nymvpn subscription payments using their credit card, using such credentials that do not contain personal data or payment information.

“However, this zero-knowledge KYC technology remains a very special purpose and requires more investment and development work to be widely applied to a variety of blockchains and different use cases,” he explained.

One of the highlights of most commentators is the need to avoid repeated entry of personal data, which can greatly expand the scope of violations and misuse.

“We start by telling users that they shouldn’t ask them to upload their government-issued IDs repeatedly to random third-party platforms,” ​​said Naveen Jain, co-founder of privacy-centric cryptocurrency Tari.

Given this red line, Spagni and Jain support compliance solutions that incorporate reusable and selective credentials.

“We have a valid KYC once, allowing users to prove to an unlimited number of platforms that they are over 18, not a sanctions list,” they said. Decryption.

Spagni and Jain advocate for the use of zero knowledge membership and proof checks. This allows users to become part of a “verified” set without revealing their personal data.

They said, “The defi frontend can then use tools like ZK proof or semaphore to make sure the user is pseudonymous, while ensuring that the user is part of this set.”

Jain and Spagni have reported “significant” advances in tracing privacy candidates in recent years, allowing authorities to track transactions where necessary, without exposing personal data to third parties.

They said, “For example, Tari has programmable confidentiality capabilities that keep all TXSs at default confidentiality on a peer-to-peer basis, while allowing Stablecoin publishers to fully access the TX graph for compliance purposes.”

We are confident that current blockchain technology can protect privacy and enable regulatory oversight, but that remains an open question about what the Treasury would recommend to Congress.

Despite the possibility of over-excess, most industry figures hope that the right balance will ultimately smash, given that requests for comment are met primarily by the industry itself.

“We hope that our industry will propose solutions that support reusable KYC, support selective disclosure, and require a platform to gather minimal information for compliance purposes,” Spagni and Jain said. “The goal is not to create a global panopticon that destroys freedom for everyone.”

Similarly, Katie Evans points out that the move to implement KYC/AML guidelines is “inevitable” when the industry wants to attract institutional and corporate recruitment at scale.

“Without these safeguards, defi risks remaining a niche,” she said. “Together with them we unlock scale, legitimacy, recruitment and enable us to use rebellion in real-life economies.”