Coinbase is advocating for the modernization of the U.S. financial regulatory framework using cryptographic technology, despite the stock falling 12% following the financial report.

Coinbase is ramping up pressure on U.S. policymakers to modernize the Bank Secrecy Act (BSA) through the adoption of Zero-Knowledge Proof technology. This move comes as the largest cryptocurrency exchange in the U.S. faces challenges regarding financial performance, with Q2 revenue falling short of Wall Street's expectations.

Paul Grewal, the Chief Legal Officer of Coinbase, in a statement on August 4, strongly criticized the current BSA as an outdated system designed for a paper-based economy, not suited to the reality of today's digital economy. He emphasized that while the BSA is an essential tool for detecting bad actors and combating illicit finance, the current Know-Your-Customer requirements force organizations to collect vast amounts of personal data, creating unnecessary privacy risks.

In Grewal's view, the core issue lies in the fact that the BSA is still bound by regulations that are decades old, reflecting a paper-based compliance process and a financial system where money flows take days instead of the seconds we see today. He argued that instead of blaming technology for creating risks, lawmakers should focus on leveraging technology to find solutions.

Zero-Knowledge Proof technology opens a new era

The solution proposed by Coinbase focuses on Zero-Knowledge Proofs, an advanced cryptographic technology that allows users to verify specific details such as identity or age without revealing accompanying sensitive data. This technology works by enabling one party to convince the other that a statement is true without disclosing any information other than what needs to be verified.

In practice, ZKPs can allow an individual to open an account at Coinbase by proving that they are not on the sanctions list or are not a minor, without needing to provide extensive personal information. This not only enhances privacy but also significantly strengthens the security of the system.

Grewal urged the U.S. Congress to shift its focus to BSA reform after the GENIUS and CLARITY bills were signed into law. He also emphasized that the U.S. Department of the Treasury needs to establish public-private partnerships to identify areas where current processes need to be adjusted to operate effectively in a ZKP-based system.

This statement was made just a few days after Coinbase's stock dropped 12% in the market trading session, a direct reaction after the company did not meet its Q2 revenue expectations.

Revenue increased by 3.3% year-over-year to $1.5 billion, but still fell short of the estimated $1.59 billion and decreased from $2 billion in the previous quarter. Spot trading volume also declined globally, while net profit surged to $1.43 billion, mainly due to unrealized gains from the cryptocurrency portfolio.

Analysts suggest that this dip is a good investment opportunity for long-term investors who still believe in Coinbase's growth potential, despite the current financial performance and legal challenges it faces.