a16z advocates for decentralized digital identity and ZK proofs in response to Treasury GENIUS requests

Andreessen Horowitz (a16z) Crypto has submitted feedback to the Treasury regarding the first post-GENIUS requests. The Treasury had initially sought input in August on “Innovative Methods to Detect Illicit Activity Involving Digital Assets” and followed up in September with an advance notice of proposed rulemaking to implement the Act.

In its response, the VC firm characterized its portfolio companies’ digital identity tech as “privacy-preserving” and showed support for zero-knowledge proofs to safeguard against surveillance.

It added, “We particularly believe that the use of decentralised digital identity can dramatically change how individuals go about their everyday lives; how businesses can fulfil their regulatory obligations; and how law enforcement and the intelligence community can fulfil their important missions.”

Meanwhile, Coinbase Global has urged the U.S. Treasury Department to maintain its forthcoming rules for the GENIUS Act tightly aligned with congressional intent.

In a detailed response to the Treasury, Coinbase stated that the Treasury should avoid imposing requirements beyond what the statute explicitly mandates, warning that overreach could stifle innovation and jeopardize the law’s goal of making the U.S. the “crypto capital of the world.”

a16z advocated for an update in AML/KYC frameworks

Michele Korver, a former federal prosecutor and regulator, noted that a16z explained that decentralized digital identity, built with privacy-preserving cryptography, can help fight illicit finance while preserving citizens’ privacy. It called for the revamp of AML/KYC frameworks, claiming outdated rules only block progress. Thus, it requested that FinCEN grant exceptions to facilitate the adoption of digital identity tools.

It also holds that decentralized digital identity can enable people to gain control over their data, boost cybersecurity, and shield against surveillance. Likewise, technologies such as zero-knowledge proofs (ZKPs) and multi-party computation (MPC) enable verifiably true identity verification without disclosing more information than necessary to each person involved.

Moreover, it insisted that FinCEN should explicitly recognize digital identity as compliant with the “non-documentary methods” allowed under the Customer Identification Program (CIP) regulations and broaden these exemptions to include money service businesses (MSBs), where most cryptocurrency exchanges fall.

Responding to the Treasury’s Advance Notice of Proposed Rulemaking on implementing the GENIUS Act, the firm advocated for stablecoin rules that encourage innovation, uphold dollar stability, and ensure consumer protection.

a16z still believes the GENIUS Act will promote innovation

In 2023, approximately 0.61% to 0.86% of on-chain crypto volumes were linked to illicit activity, totaling between $46.1 billion and $58.7 billion, according to a report released in August by the White House Working Group on Digital Asset Markets.

However, a16z cited a 2011 UN report that the average rate of interception in anti–money laundering activities is approximately 0.2%, indicating how difficult it can be to identify illicit assets correctly.

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