Coinbase Anti-Money Laundering Reform Proposal: The Art of Balancing Innovation and Compliance

Recently, one of the largest cryptocurrency exchanges in the United States, Coinbase, submitted a 30-page policy proposal to the U.S. Department of the Treasury, calling for a comprehensive reform of anti-money laundering (AML) regulations that have been in place for decades. Its core argument—“When bad actors innovate, good actors must also innovate”—has quickly sparked widespread discussion both within and outside the cryptocurrency industry. Coinbase advocates that, in the face of increasingly sophisticated digital asset crimes, reliance should be more on technological innovation rather than simply strengthening enforcement. As an organization committed long-term to maintaining the integrity of the financial system, the Hong Kong Anti-Money Laundering Alliance believes Coinbase’s proposal touches on a core issue of the global AML system: how to encourage financial innovation while ensuring a robust and effective regulatory framework to prevent risk exposure from expanding.

We acknowledge that technology is an indispensable ally in the fight against AML. However, while embracing innovation, we must carefully assess potential risks and remain vigilant against any attempts to weaken core regulatory principles under the guise of “innovation.” This article will analyze the reasonableness and potential risks of Coinbase’s proposal from a regulatory professional perspective, combined with Hong Kong’s practical experience in global virtual asset regulation, to explore the future balance in digital asset AML efforts.

The Double-Edged Sword of Innovation: Core Demands and Potential Risks of Coinbase’s Proposal

Coinbase’s proposal mainly revolves around four major technological innovations: Application Programming Interfaces (APIs), Artificial Intelligence (AI), Decentralized Identity (DiD), and Zero-Knowledge Proofs (ZKP), as well as blockchain-based trade analysis (KYT). Its core demand is to establish “Regulatory Safe Harbors” for financial institutions adopting these innovative technologies, to reduce compliance burdens and encourage technological application.

In its response document, Coinbase explicitly states: “The era of a person walking into a bank to show ID for account opening is long gone… Requiring companies to collect copies of identification documents online not only poses significant identity theft risks but also requires substantial compliance resources.” [1]

This view reflects the reality of financial services in the digital age. However, the establishment of “Safe Harbors” must be based on extremely cautious and clear conditions. If standards are too lax, the following risks may arise:

Coinbase believes that “the greatest illegal financial risk in the crypto ecosystem is not the technology itself, but the weak links allowing criminals to convert cryptocurrencies back into cash, such as non-compliant offshore entities.” [1] This judgment is accurate, but it cannot serve as a reason to relax AML/CFT requirements for core financial intermediaries. On the contrary, it is precisely because these weak links exist that it is even more necessary to ensure that large, systemically important licensed institutions like Coinbase can fulfill the strictest AML/CFT obligations and serve as the first line of defense against illicit funds.

Hong Kong Experience: Leading Innovation with Prudence

Amid the global wave of virtual asset regulation, Hong Kong has chosen a cautious yet forward-looking path. Since June 1, 2023, Hong Kong has officially implemented a mandatory licensing regime for virtual asset service providers (VASPs), bringing all centralized cryptocurrency exchanges under comprehensive regulation by the Securities and Futures Commission (SFC). This framework has not sacrificed regulatory certainty and rigor in pursuit of innovation, providing a valuable example for the world.

Unlike Coinbase’s pursuit of “Safe Harbors,” Hong Kong’s regulatory philosophy is “Same Business, Same Risk, Same Rules.” This means that regardless of the innovative technology adopted by VASPs, their core AML/CFT obligations—including Customer Due Diligence (CDD), ongoing transaction monitoring, Suspicious Transaction Reports (STR), and compliance with the Financial Action Task Force (FATF) “Travel Rule”—must be strictly enforced.

The Hong Kong SFC explicitly states in its regulatory framework that VASPs adopting new technologies must demonstrate to regulators the reliability, security, and compliance of their technology, and establish sound governance and supervisory mechanisms. For example, when using AI for transaction monitoring, platforms must be able to explain the logic of their algorithms, verify their effectiveness, and be responsible for the final decisions. This approach does not suppress innovation but guides it to develop responsibly.

Conclusion: Moving Toward Responsible Innovation

Coinbase’s proposal serves as a wake-up call for global regulators: clinging to outdated regulations in the face of rapidly evolving digital asset technology can lead to regulatory failure. We support leveraging technology to improve the efficiency and accuracy of AML efforts. However, the core principles of AML—Know Your Customer (KYC), risk assessment, and behavioral monitoring—must not be compromised by technological superficiality.

We call for any AML system reform to adhere to the following principles:

1. Technology-Neutral, Risk-Based: Regulations should focus on the risks inherent in financial activities, regardless of the technological means used. Both traditional banks and crypto platforms should be regulated according to their risk levels.

2. Clear Responsibility, Not Reliance on “Safe Harbors”: Financial institutions should always be primarily responsible for AML compliance. Regulators can provide guidance but should not establish vague “Safe Harbors” to exempt or lessen institutions’ core responsibilities.

3. Strengthen International Cooperation to Fill Regulatory Gaps: As Coinbase pointed out, non-compliant offshore entities pose significant risks. Regulators worldwide should enhance cooperation under frameworks like FATF to combat cross-border money laundering.

The Hong Kong Anti-Money Laundering Alliance will continue to monitor the latest developments in global digital asset regulation and work closely with industry and regulators to promote a healthy financial ecosystem that embraces innovation while effectively managing risks. We believe that only through a balanced approach of innovation and prudence in compliance can the digital asset industry achieve sustainable growth.

References

[1] Coinbase. (2025, October 17). Response to Treasury RFC on Innovative Methods to Detect Illicit Activity Involving Digital Assets.

(Cover image sourced from Baidu)