The Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) jointly issued the proposed rules to implement the GENIUS Act. Comments were invited.
In response, the Midnight Foundation submitted a formal response to the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC). These regulatory bureaus jointly issued the proposal to establish updated anti-money laundering and sanctions compliance program requirements for stablecoins.
This engagement provides an opportunity to share technical insights with policymakers during the rulemaking process. The Midnight Foundation’s mission is to grow the Midnight network and support the global community around it. Contributing to these consultations helps ensure emerging policies reflect recent innovations in compliance-oriented selective-disclosure blockchain technology.
Public transparency versus regulatory auditability
Historically, regulators often designed frameworks under the assumption that blockchains must operate as fully transparent public ledgers. Public blockchain architecture typically exposes all transaction data, including sender, recipient, amount, and balance, to any observer. In the formal response, the Midnight Foundation identifies severe risks with this default structure, such as the financial surveillance of lawful activity and the exposure of commercially sensitive data.
Fully transparent networks also present national security risks, as foreign adversaries can map the financial flows of domestic defense contractors and critical infrastructure operators. However, regulatory visibility requires authorized parties to access specific transaction data. This can now be achieved for compliance without forcing public exposure.
Implementing privacy-enhancing technology during the rollout of new financial infrastructure protects sensitive information, which will enable broader commercial and institutional adoption.
Technical expertise in selective disclosure
The Midnight Foundation possesses direct expertise relevant to these specific regulatory challenges due to the core architecture of the Midnight network.
The Midnight network incorporates sophisticated privacy-enhancing technologies including zero-knowledge proofs and selective disclosure. Zero-knowledge proofs allow a user to prove a statement is true, such as verifying compliance with a sanctions list, without revealing any of the underlying private data. Selective disclosure allows a participant to share a limited amount of specific information with an authorized party based on predefined rules.
The Midnight Foundation encourages regulators to understand the benefits of both zero-knowledge proofs and selective disclosure as effective technological tools to manage compliance risk.
Legacy blockchains lack the functionality to program both user privacy and regulatory compliance into smart contracts. On public blockchains, developers cannot keep information confidential, even when desired by the user or required by data protection regulations.
Conversely, legacy privacy chains do not possess selective disclosure capabilities. Developers using less sophisticated chains cannot define secure, pre-programmed rules to share sensitive data with authorized parties. This technical limitation makes it difficult for stablecoin issuers to fulfill compliance obligations without either completely exposing or entirely hiding network activity.
The core architecture of the Midnight network moves beyond these limitations by allowing creators to program compliance logic directly into confidential smart contracts. This capability enables applications to protect sensitive data by default while hardcoding specific regulatory permissions based on active legal requirements.
Advancing compliance through pre-settlement enforcement
Cryptographic tools enable strict compliance enforcement before a transaction even settles. A stablecoin smart contract can mandate a zero-knowledge proof verifying that neither the sender nor the recipient appears on a sanctions list. Midnight provides the tools to build applications that can automatically reject non-compliant transfers before settlement occurs. This proactive method of enforcement may provide stronger compliance results than the previous method of identifying violations on a public ledger only after they happen.
Supporting technology-neutral policy
Policy frameworks should support the latest innovations while meeting established anti-money laundering and sanctions compliance objectives.
The Midnight Foundation supports regulatory rules defined by compliance outcomes rather than mandates for specific, publicly transparent architectures. The proposed alternative delivers the regulatory visibility the government needs while not disclosing sensitive financial data, providing the security that citizens and institutions expect.
The Foundation regularly shares this technical knowledge across the community and ecosystem, and submitting responses to policymaking consultations is part of the Midnight Foundation’s goals of breaking down barriers and encouraging collaboration to build a more fair, open and accessible blockchain ecosystem.
The Midnight Foundation’s full submission to FinCEN and OFAC is available via the official public docket.