US - Crypto Regulations

The US regulatory framework for cryptocurrencies is complex and still developing. Companies in this space need to stay updated with the latest developments and be ready to adapt to changes. A verification solution is crucial for compliance with regulations and preventing illegal activities.

US Crypto Regulation Landscape: The US is still in the process of creating an efficient set of digital asset regulations. The regulatory landscape is complex due to the involvement of multiple regulators with overlapping responsibilities.

Regulators: The main federal institutions regulating digital assets in the US include the Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC). The specific regulator involved depends on whether a digital asset is classified as a money transmitter, security, or commodity/derivative.

Who is Affected?: Regulations apply to entities defined as "financial institutions" under the Bank Secrecy Act (BSA), which includes money services businesses, securities brokers/dealers, futures commission merchants, introducing brokers in commodities, and mutual funds. Several business models involving the transmission of digital assets are also considered regulated under certain circumstances.

Regulations: The Bank Secrecy Act, the US Patriot Act, and the Anti-Money Laundering Act provide the framework for regulation. There are also registration requirements under the Commodity Exchange Act and Securities Exchange Act for assets considered securities and commodities.

Crypto Mining: Mining cryptocurrency is legal in all US states, but some states may impose limits due to environmental concerns. For example, New York state introduced a temporary two-year moratorium on certain types of crypto mining.

Compliance: Companies dealing with digital currencies must comply with the BSA and be registered with FinCEN, SEC, and CFTC, depending on the nature of the assets. They also need to follow state-level regulations. In addition, companies must establish an Anti-Money Laundering (AML) program, a Customer Identification Program (CIP), and satisfy recordkeeping and reporting requirements.

State Differences: Each US state might have its own regulations and licensing procedures for digital assets, although cryptocurrencies are legal in all states.

ZKP in DeFi

Zero-knowledge proofs can also enable a DeFi service user to confirm that their identity has been verified without revealing personal information.

— Illicit Finance Risk Assessment of Decentralized Finance, U.S. department of the treasury, April, 2023

The report, authored by the Treasury Department, pointed to the growing use of cryptocurrency to pay for goods and services as a threat to government attempts to limit money laundering and the financing of terrorism. Among a series of recommendations to prevent money laundering via crypto, one example was buried deep within the report: privacy-enhancing tech.

The authors wrote that “the U.S. government supports privacy enhancing technologies that simultaneously allow for or even promote compliance with AML/CFT obligations.” Still, it noted that “the use of non-public blockchains” by non-compliant entities “will heighten AML/CFT risks.”

Several pages later, the report notes that zero-knowledge proofs can be used to verify that someone has passed an anti-money laundering check without harvesting or broadcasting their personal information.

— Treasury: ZK Proofs Can Be Boon Or Bane Of AML Compliance, The Defiant, Aleksandar Gilbert April 07, 2023