a16z highlights importance of decentralized digital ID for crypto in US gov’t feedback

The American government should reform its regulations for financial institutions to allow them to use merging technologies, particularly those related to decentralized digital identity solutions, to comply with the “GENIUS” Act, according to Andreessen Horowitz (a16z).

The venture capital firm responded to a request for comment issued by the treasury department in August, seeking feedback on “Innovative Methods to Detect Illicit Activity Involving Digital Assets,” and an advance notice of proposed rulemaking in September on implementing the Act. The first letter was directed to Julie Lascar, director of the Office of Strategic Policy, Terrorist Financing and Financial Crimes, and the other to Treasury Secretary Scott Bessent.

A16z is an investor in Spruce Systems and World, having led funding rounds for both, and focusses on digital identity verification in its letter on methods to detect illicit activity. The VC firm describes the technologies from the digital identity providers it is invested in as “privacy-preserving,” and professes support for zero-knowledge proofs (ZKPs) as a way of preventing surveillance. A 2022 investment announcement by a16z explains how SpruceID’s technology enables people to use the cryptographic private keys for their digital wallet to directly control their digital identity.

“We particularly believe that the use of decentralized digital identity can dramatically change how individuals go about their everyday lives; how businesses can fulfill their regulatory obligations; and how law enforcement and the intelligence community can fulfill their important missions,” writes a16z.

The firm explains the role of decentralized identifiers (DIDs) and verifiable digital credentials (VDCs) in decentralized ID, and how their use for meeting Bank Secrecy Act (BSA) and anti money laundering (AML) obligations is currently discouraged.

FinCEN should make clear that digital identity can satisfy the “non-documentary methods” provisions in Customer Identification Program (CIP) rules, and extend those exemptions to more businesses, like money service businesses (MSBs), which a16z says most crypto exchanges qualify as.

An August report from the White House’s Working Group on Digital Asset Markets claimed that only 0.61 percent to 0.86 percent of onchain digital asset volumes in 2023, or $46.1 billion to $58.7 billion, were illicit. But a16z cites a 2011 UN report noting that interception rate for AML is low; likely around 0.2 percent, highlighting the difficulty of identifying with sufficient certainty just which assets are illicit.

The second letter delves into the details of SBA and AML compliance, suggesting that the rule should differentiate between the responsibilities of primary and secondary digital asset markets.

Regulatory clarity is essential to realizing the promised economic benefits of the GENIUS Act, the firm says, but “we are concerned that the ANPRM may inadvertently create confusion by asking for comments on topics that appear to be the provenance of other regulators.”

Article Topics

Andreessen Horowitz  |  cryptocurrency  |  decentralized ID  |  decentralized identifiers (DIDs)  |  digital ID  |  digital wallets  |  FinCEN  |  SpruceID  |  verifiable credentials  |  World