Regulators and Industry: Building a Path to Compliance 3.0

Tl;dr: Coinbase submitted its response to the U.S. Treasury Department’s request for comment on “Ensuring Responsible Development of Digital Assets,” which focuses on the risk of illicit finance in crypto. We explain the exceptional compliance opportunities provided by the blockchain that enable far more effective disruption of illicit finance and compliance with anti-money laundering regulations, and we recommend that Treasury focus on incentivizing and increasing adoption of the next generation of groundbreaking compliance technologies, as opposed to adding new, less effective regulatory requirements.

By Paul Grewal

Policy

, November 1, 2022

Coinbase Blog

Developing the Next Generation of Compliance

This request for comment comes at a time of enormous opportunity for the United States to lead the world in digital asset innovation, but this opportunity depends in significant part on Treasury and other key federal agencies creating a regulatory landscape that fosters the growth of compliant companies.

  • How the Blockchain Enhances Our Effectiveness. The emergence of crypto over the last decade has given virtual asset service providers (VASPs) a powerful new set of compliance tools to radically enhance our effectiveness at identifying and disrupting illicit finance. These new tools harness the public and transparent nature of the blockchain, allowing VASPs to track the flow of assets beyond what happens on their individual platforms, thus giving them a far deeper and richer understanding of the risks posed by specific transactions and customers. This blockchain data is integrated into compliance systems to enhance overall effectiveness—taking compliance from manual review of bulk records to dynamically integrating data about transactions and customers, what we call “Compliance 3.0."

  • Unlocking Opportunities Instead of Imposing Ineffective Regulations. Coinbase recommends that Treasury focus on unlocking and incentivizing additional groundbreaking new compliance technologies—including in the areas of blockchain analytics and decentralized identity—to truly enhance overall effectiveness, as opposed to imposing new bulk recordkeeping/reporting requirements that are far less effective. And Coinbase welcomes the opportunity to partner with Treasury to maintain the United States’ technological leadership while protecting against emerging financial crime threats. We also strongly support Treasury’s recommendation to establish a federal regulatory framework for payments regulation.

  • Enforce Existing Rules, Instead of Creating New Ones. As Treasury and the Department of Justice have noted, a significant illicit finance risk today is posed by criminal actors using noncompliant exchanges to liquidate and conceal the proceeds of their crime. Treasury already has ample authority to address these failures by enforcing its existing rules. Noncompliancewith existing rules does not equate to gaps in existing regulations. 

Coinbase appreciates the opportunity to work with Treasury to develop sound, effective regulation. By encouraging novel and collaborative approaches to combating illicit finance, Treasury can make regulatory and law enforcement efforts more effective while also ensuring that the United States remains at the forefront of innovation in financial services.

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Paul Grewal

About Paul Grewal

Paul Grewal is the Chief Legal Officer of Coinbase where he is responsible for Coinbase’s legal, compliance, global intelligence, risk management and government relations groups. Before joining Coinbase, Paul was Vice President and Deputy General Counsel at Facebook. Prior to Facebook, Paul served as United States Magistrate Judge for the Northern District of California. Paul was previously a partner at Howrey LLP, where his practice focused on intellectual property litigation. Paul served as a law clerk to Federal Circuit Judge Arthur J. Gajarsa and United States District Judge Sam H. Bell. He received his JD from the University of Chicago Law School and his BS in Civil and Environmental Engineering from the Massachusetts Institute of Technology.

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