Crypto industry executives have urged the US Securities and Exchange Commission to shift its thinking on blockchain privacy tools, pitching that there are legitimate applications for them outside of criminal use.

The SEC hosted crypto and finance executives for a discussion and panel on financial surveillance and privacy on Monday, the agency’s sixth crypto-focused roundtable this year, as it seeks to overhaul its approach to crypto.

StarkWare general counsel Katherine Kirkpatrick Bos, who participated in a panel discussion, told Cointelegraph after the event that a major takeaway was that there shouldn’t be an assumption that those using and creating privacy tools are “overwhelmed by wrongdoers.”

“Why is the assumption that an individual needs to affirmatively prove that they are compliant or they’re using the tool for good?”

“As opposed to it being the other way around, where the assumption is that this individual is using the tool for good until there is some sort of indication that they’re using it for bad,” she said.

Kirkpatrick Bos added that “of course, wrongdoers were using, or are using those tools, but there needs to be a balance.”

During the roundtable, Wayne Chang, the founder and CEO of the credential management company SpruceID, said some percentage of users of stablecoins, a crypto tool that is slowly becoming mainstream, will want privacy.

“There are a ton of stablecoins that aren’t onchain yet that would come onchain if there is privacy,” he said. “We’re going to see an increase in demand for privacy-preserving blockchains.” 

“My hope is that regulators continue to engage industry, and we can have those discussions on how to keep privacy for folks while also having tools that are useful,” Chang said.

Customer checks are becoming outdated

Kirkpatrick Bos said a discussion on Know Your Customer (KYC) and Anti-Money Laundering (AML) measures focused on whether current rules are sufficient in the age of artificial intelligence.

“The question arose and was debated on the panel, well, what is necessary for Anti-Money Laundering?” she said. “Now we have AI. It’s made manual, AML and KYC antiquated. How do we solve for that?”

“There was a sense that the current system of AML and KYC is antiquated, it’s problematic, it’s ineffective,” she added. “But there needs to be some sort of check when it’s a centralized entity facilitating flows of money to ensure that they’re not helping wrongdoers.”

Many financial institutions request a picture of a user’s driver’s license for its KYC checks, which Kirkpatrick Bos said was “absurd, because an individual can go on the internet and develop a fake driver’s license in a matter of seconds.”

“So the question is, can cryptography-based tools improve that and make it harder for bad guys to do that? But can they also do that and make it harder for bad guys while preserving an individual’s privacy and not revealing data like an address, where it is not necessary to vet the legality of the funds?” she added.

Some projects have begun to test crypto-based solutions for proving identity while claiming to preserve privacy, such as Sam Altman’s World, which gives users a cryptographic key they can use to prove they’re human.

SEC’s Atkins warns of potential for crypto mass surveillance

SEC chair Paul Atkins had given opening remarks at the roundtable, warning that if “pushed in the wrong direction, crypto could become the most powerful financial surveillance architecture ever invented.”