SEC Commissioner Hester Peirce: Zero-Knowledge Proofs Can Verify Compliance
U.S. Securities and Exchange Commission Commissioner Hester Peirce stated at the SIFMA Digital Assets Conference that zero-knowledge proofs can demonstrate compliance with specific requirements without collecting users' names, income, or addresses. She described the current Know Your Customer (KYC) and anti-money laundering frameworks as a growing "data haystack": financial institutions collect names, birth dates, addresses, and identification numbers as required by the government, with the theory being that a larger haystack makes it easier to find the needle hidden among the law-abiding majority, but in reality, a larger haystack makes it harder to find the needle.
She proposed using attribute-based credentials for verification: verifiable facts such as age, nationality, accredited investor status, and not being on a sanctions list, without needing to disclose the underlying data that generates these facts. Zero-knowledge proofs only answer "This person meets your criteria" without disclosing records. She stated that the tools are available, but what is lacking is a regulatory framework that allows and encourages their adoption, advocating for a shift from regulatory checklists to attribute verification where technically feasible, and re-evaluating whether each rule truly requires that data point and whether the transaction collection threshold is too low.
She clarified that her remarks are personal opinions and do not represent the Commission. She compared the financial system's accumulation of sensitive information to a panoramic prison and stated that public chain ledgers are more transparent and harder to tamper with than paper records, suggesting that on-chain evidence collection could enhance tracking of illegal activities while minimizing data collection. She recommended that registered entities rely more on third-party identity verification to reduce the repeated collection and storage of sensitive information. The EU's digital identity wallet has already used similar proofs for age verification; standards like those from FATF still require obligated entities to complete verifications and retain reconstructable evidence, indicating that the proof layer cannot replace retention obligations.
Mechanically, what is being bought is compliance technology and wallet credential issuers that can replace entire file copies with a single proof, while what is being sold is the outdated KYC outsourcing chain that turns every intermediary into a personal data warehouse. The event-driven aspect is that the commissioner included cryptographic tools in her public remarks, not that the rules have changed. Funding is shifting from repeated due diligence budgets to credential issuance and verification interfaces; benefiting are attribute credential and zero-knowledge proof suppliers, while those relying on bulk storage of identity documents for fees are under pressure, as are those who treat "more collection" as a safe law enforcement practice. The Commission has not voted on this path, and FinCEN and the Bank Secrecy Act continue to be executed according to current texts.
Source: Public Information
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Peirce has long criticized the expansion of financial surveillance, this time targeting the KYC collection checklist rather than crypto itself. The haystack metaphor frames the efficiency issue as a structural problem: the more data there is, the worse the marginal detection, with privacy costs and exposure to leaks rising simultaneously. Attribute credentials break down "who you are" into "are you over 18, are you an accredited investor, are you not sanctioned," and zero-knowledge proofs turn the answers into non-reusable yes/no. What is lacking is not the mathematics, but regulatory recognition that "proof equals compliance" rather than "copies equal compliance." She also left room for law enforcement to collect evidence on public chains, avoiding accusations of giving a green light to anonymity.
The capital path is a reallocation of compliance budgets. Intermediaries today store the same client's passport copies in multiple custodians, brokers, and exchanges; the credential model allows issuers to verify once, with downstream entities only verifying the proof. Whoever can become a recognized attribute issuer by regulators will reap new licensing rents. Those charging fees based on archival duration and retrieval frequency will see their databases shrink. If tokenized stocks and innovative exemptions are implemented, accredited investor verification will likely become a testing ground, as this attribute is not inherently tied to names.
Analogies include the EU digital wallet's age proof, zero-knowledge proofs for exchange reserves, and electronic passport chips that only answer "not expired": all shift disclosure from data packets to propositions. FATF's five-year retention requirement means obligated entities may still hold the original documents on the backend, with proofs merely compressing external sharing. The industry phase is shifting from "should there be KYC on-chain" to "should KYC disclose the original documents." Whoever first writes attribute standards that can be referenced in SEC staff correspondence will define the next version of the account opening process.
Structural judgments belong to regulatory changes. Pricing power shifts from "which fields must be submitted" to "which propositions must be proven." The mechanism is that the monitoring system is designed by fields; the more fields there are, the higher the costs and the greater the risk of leaks; cryptography transforms fields into propositions, shifting compliance costs from storage to verification computation. Haystacks will not shrink on their own unless rules allow proofs to replace copies.
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- The larger the haystack, the easier the needle is not necessarily to find, just the greater the exposure.
- Compliance often requires a proposition, not an entire file.
- The day proofs can pass, the copy business will begin to depreciate.