TL;DR
- SEC Commissioner Hester Peirce proposed a KYC model that verifies legal requirements without each platform accumulating complete identity files.
- The scheme uses verifiable credentials and zero-knowledge proofs to confirm age, jurisdiction, and sanctions list status without exposing the original documents.
- FinCEN has already authorized the use of government digital credentials at banks, but legal data retention obligations remain in force.
Securities and Exchange Commission (SEC) Commissioner Hester Peirce proposed a reform to the KYC model applied to digital asset platforms during her address at SIFMA’s digital assets conference.
Her proposal aims to allow operators to verify that a client meets legal requirements —minimum age, eligible jurisdiction, and absence from sanctions lists— without the need to store a complete identity file. These statements represent her personal position and do not constitute a rule, formal proposal, or exemption from the SEC.
How Would the New KYC Work?
The mechanism described by Peirce rests on two technologies: verifiable credentials and zero-knowledge proofs. A trusted issuer —a government agency, a regulated institution, or a certified provider— examines the client’s original documents and issues a cryptographically signed credential that the user stores in a compatible digital wallet.
When the platform requests a KYC verification, it receives only the answers relevant to the service —”compliant”, “confirmed”, “approved”— without accessing the user’s passport, address, or financial history.
Limits That Technology Cannot Cross
The proposal redistributes where KYC personal information resides, but does not eliminate identity verification. The original issuer still needs reliable evidence, and the platform remains responsible for knowing whether that verification was carried out rigorously. A stolen wallet or a compromised credential are an alternative avenue for fraud. It also fails to resolve the need to monitor transactions, report suspicious activity, or establish the origin of a client’s funds.
For now, regulations are moving more slowly than technology. On September 8, FinCEN published guidance allowing banks and credit unions to use government digital credentials —including mobile driver’s licenses— to verify their clients, though without eliminating existing data retention obligations.
The unanswered question is when a verified response can legally substitute a complete identity file, a decision that requires the intervention of regulators beyond the SEC.
