SEC’s Hester Peirce calls for less KYC data and more cryptographic privacy

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In a last-minute speech as an SEC commissioner, Hester Peirce pointed out that the financial system collects too much personal data for identification while protecting too few individuals, and that cryptography could solve both issues at once. 

The message matters to all crypto holders whose passports and transaction histories are stored in vulnerable databases, and it comes at a time when a chain of KYC data leaks has made this data a threat to physical safety.

Haystacks that hide the needle

At the same conference, Peirce criticized the know-your-customer and anti-money laundering regulations based on the presumption that collecting data from a sufficient number of people would enable authorities to identify criminals among them as an outdated approach.

“It’s about building bigger and bigger data haystacks, and then hoping that we will find a needle or two in them,” she said. “But the bigger data haystack, in turn, becomes less likely to reveal any needles.”

Her presentation at the SEC event titled “Looking for Change in Haystacks” presented the time as a crossroads when the first route involves accumulating more and more data through intermediaries until the financial rails turn into a panopticon, while the other leverages new tools to catch criminals while collecting less personal data. Peirce singled out “data maximalists,” which, in her opinion, include not only officials but private companies hired to collect customer data on the premise that there can never be too much of it.

Hester Peirce wants KYC without handing over your identity

Her alternate proposal involves the use of zero-knowledge proofs, which allow one party to verify the accuracy of a statement without disclosing any data. Peirce used this along with an “attribute-based verification,” which is a scheme that checks for compliance based on a single attribute instead of storing an entire identity file.

In an interview, Peirce explained that “one can prove that you qualify without that counterparty knowing your name, income, or address.” The same technology powers private and secure networks and assets like Zcash.

However, Peirce did elaborate on the issue of privacy in public blockchains. In her opinion, these provide an unprecedented amount of transparency and immutability, which no legacy record-keeping system can rival. She also suggested allowing regulators to outsource identity verification to a third party, and then issuing cryptographic certificates for users that can be moved from platform to platform.

Why the timing bites

This argument comes amid the leaks, making the abstract argument of privacy very real. Recent breaches include Revolut leaking customers’ passport information as well as Bitcoin transaction history, and even breaches by vendors to Trezor, the hardware wallet maker. These attacks have increased fears of what is called a “wrench attack,” where attackers who find out who is holding the cryptocurrency attack the individuals physically. Every centralization of data to comply with the KYC regulations becomes an attack vector to harm the people it is intended to protect.

Furthermore, she connected her argument to projects the agency had already underway. She cited the “Innovation Exemption” that the Commission made a week before her speech, an exemption that allows tokenized securities to be traded on cryptocurrency networks via automated market makers. Chairman Paul Atkins sees it as a stepping-stone towards regulation, Peirce said.

A signal, not a rule

It may be important to emphasize the nature of this speech. Peirce’s speech is a policy signpost coming from the SEC, but not a formal proposal since no proposal was filed and there was no announcement of particular guidelines. Peirce, who has served on the SEC since 2018 and is always advocating for innovations in the sphere of digital assets, gave her own disclaimer that the views expressed were her personal ones and could not necessarily be adopted by the Commission.

She is also running out of power to implement this proposal. This is because Peirce’s term in office expires in the near future, and she has plans to move to Virginia Beach. Therefore, readers need to pay attention to how this proposal is implemented and how other commissioners will support it or develop it into guidance by the SEC or by Congress. Until this happens, the Panopticon described by Peirce remains where it is.

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