SEC’s Peirce urges shift from KYC/AML data collection to zero-knowledge proofs

• SEC Commissioner Hester Peirce urges regulators to reconsider flipping traditional data-collection requirements for decentralized systems.
• She says the traditional approach to combating financial crimes has failed to keep pace with recent technological developments.
• Peirce argues that public ledgers are transparent and hard to alter, making it a safer option for regulators to monitor data.

US Securities and Exchange (SEC) Commissioner Hester Peirce has called on regulators to reconsider traditional data-collection requirements around know-your-customer (KYC), anti-money laundering (AML) and financial surveillance, arguing that cryptographic tools could provide a more privacy-preserving approach.

Hester Peirce suggests shift to zero-knowledge proofs for data collection

Speaking at SIFMA’s Digital Assets Conference in New York on Wednesday, Peirce said regulators should explore decentralized identity systems, attribute-based credentials and zero-knowledge (zk) proofs. She noted that these could serve as alternatives to requiring financial institutions to collect and store large amounts of sensitive customer information continuously.

Peirce argued that the existing approach to combating illicit finance has remained largely unchanged for decades, despite significant advances in technology.

“For decades, the approach to ferreting out illicit finance and uses of the financial system to facilitate other illicit activity has been the same: collect more and more data,” Peirce said in a statement.

Under existing KYC and AML frameworks, financial institutions collect information such as customers’ names, dates of birth, addresses and identification numbers, while also monitoring transactions and filing reports on suspicious or specified activity.

“The approach is not working particularly well, and technology has outpaced our legacy approach, so it is time for a change,” she stated.

The commissioner also raised concerns about the privacy and security risks created by accumulating personal and confidential business information. She noted that every additional piece of data retained by government or private entities creates another opportunity for that information to be mishandled or compromised.

On the other hand, Zero-knowledge proofs offer a more secure alternative. Peirce described cryptography as a way to verify specific facts without accessing the underlying personal information.

She cited attribute-based credentials that could verify whether an individual meets requirements such as age, investor status, or not appearing on sanctions lists, without revealing the data behind those credentials.

A zero-knowledge proof could take this approach further by letting a counterparty confirm that an individual satisfies a requirement without learning the person’s identity or other sensitive information.

“A zero-knowledge proof can tell a counterparty ‘Yes, this person meets your requirement’ without that counterparty knowing your name, income, or address,” Peirce said.

She argued that the technology already exists to reduce the amount of information individuals provide and the number of entities that need access to it. What remains necessary, she said, is a regulatory framework that permits and encourages adoption of these tools.

Peirce called for federal agencies and regulated institutions to move away from prescriptive data-collection requirements and toward attribute-based verification where technologically feasible.

Public blockchains could aid financial surveillance

The commissioner also highlighted public blockchain networks as a potential tool for improving financial transparency. She said public ledgers are more transparent and harder to alter than traditional paper records, while blockchain forensics can allow law enforcement to analyze transaction histories.

Her comments came alongside discussion of the SEC’s recently announced Innovation Exemption, which provides a temporary framework for trading tokenized securities on crypto networks through automated market makers.

Peirce described the exemption as a bridge toward longer-term rules for intermediaries and venues facilitating tokenized securities markets.