The central question in the next phase of stablecoin regulation is not whether issuers must comply with anti money laundering and sanctions rules. It is whether they can do so without turning every customer relationship and commercial payment into public information.
That is the policy space Midnight Foundation is entering. In a statement on its engagement with regulators, the foundation said it had submitted a formal response to the U.S. Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN, and the Office of Foreign Assets Control, or OFAC. The response addresses proposed rules for permitted payment stablecoin issuers under the GENIUS Act.
“A transaction, for purposes of 1033.320, is not conducted or attempted by, at, or ( printed page 18610) through a permitted payment stablecoin issuer only because a transfer by third parties results in an interaction with a permitted payment stablecoin issuer's smart contract.”
Midnight’s argument is that zero knowledge proofs and selective disclosure should be considered part of the compliance toolkit. The foundation is not presenting privacy as a way to remove oversight. Instead, it is advocating a system in which an institution can prove that a payment satisfies a regulatory condition without revealing every underlying piece of data on a public ledger.
That distinction matters because public blockchains create a difficult tradeoff for financial institutions. Transparency can make transactions easier to audit, but unrestricted transparency can also expose customer identities, payment histories and commercial relationships. Traditional financial systems generally keep that information within institutions and provide it to authorities under defined legal and compliance processes. A public blockchain changes the visibility of the transaction layer, even when the people behind the addresses are not immediately known.
A regulatory debate, not only a technical one
The official regulations.gov entry for Midnight Foundation’s comment places the foundation’s position inside the formal rulemaking process. That gives the proposal a different weight from a product announcement or a technical paper. It is now part of a debate over the operating requirements that could shape how permitted payment stablecoin issuers build transaction monitoring, sanctions screening and reporting systems.
The joint FinCEN and OFAC proposed rule is intended to implement GENIUS Act requirements covering anti money laundering, the Bank Secrecy Act and sanctions compliance for permitted payment stablecoin issuers. Those obligations create the institutional test for privacy systems. A privacy mechanism will have to support real compliance outcomes, not simply make data harder to see.
That means a regulator or regulated issuer would need answers to practical questions. Can a system demonstrate that a wallet or transaction passed the required screening? Can it show that a payment complied with a rule without disclosing unrelated information? Can authorized investigators obtain additional information when the legal conditions for access are met? And can the system preserve an audit trail that is understandable to institutions, examiners and enforcement agencies?
Midnight’s use of selective disclosure addresses that middle ground. Information is not necessarily exposed to everyone, but it can be disclosed to the party with a legitimate reason to inspect it. In principle, zero knowledge proofs can allow a user or institution to prove that a statement is true without revealing all the data used to establish it.
The word “in principle” is important. A cryptographic proof can establish that a defined condition has been met. It does not, by itself, decide which conditions regulators should require, who is authorized to request more information, how identity systems should work or how institutions should respond when a risk signal appears. Those are governance and implementation questions.
Privacy as controlled disclosure
For Midnight, the filing helps sharpen an institutional narrative. Privacy is not being presented as concealment from regulators. It is being framed as controlled disclosure with verifiable results.
That approach could appeal to financial institutions that want the settlement advantages of public blockchain networks but are unwilling to publish sensitive business information permanently. A company may want to prove that a payment passed a sanctions check without broadcasting the identity of a supplier. A stablecoin issuer may want to demonstrate that its controls operated correctly without exposing its entire customer database. A regulator may want access to relevant evidence without requiring every transaction to be visible to every market participant.
The comparison with transparent blockchains should be made carefully. Public visibility can help independent observers follow token movements, but it does not automatically prove that a transaction was screened, that an entity was correctly identified or that a compliance decision was made appropriately. Conversely, a private system can restrict visibility, but restricted visibility alone does not guarantee accountability.
The proposed model therefore depends on the quality of the proofs, the rules around disclosure and the institutions responsible for operating them. If those elements are weak, privacy can become an obstacle to enforcement. If they are well designed, privacy could reduce unnecessary exposure while preserving a route to verification.
The test ahead
The important outcome of Midnight’s intervention will not be whether regulators repeat the language of zero knowledge proofs. It will be whether they treat those proofs as usable compliance infrastructure.
That requires more than technical possibility. Issuers would need systems that can integrate with existing screening processes, retain usable records, respond to lawful requests and explain their controls to supervisors. The standards would also need to distinguish between information that can remain private and information that must be available to an authorized authority.
For the broader crypto industry, this is the more consequential question. Stablecoin regulation is helping define whether blockchain privacy will be treated as incompatible with financial oversight or as a method for making oversight more precise.
Midnight’s case will be weaker if privacy is described only as a promise to users. It will be stronger if the foundation can show how selective disclosure assigns access, how zero knowledge proofs map to specific regulatory requirements and how enforcement works when a transaction cannot simply be inspected by everyone.
The conclusion could change if regulators accept those mechanisms as reliable, auditable and enforceable. Until then, Midnight has moved privacy from a protocol feature into a policy claim. The next test is whether that claim can survive the operational demands of stablecoin compliance.
- Daderot · CC0 1.0
Jesica Davis is not a person. No notebook, no deadlines, no face behind the name — just a byline this newsroom publishes under. Here is the production line underneath it, because a name beside a portrait reads like a journalist, and this one is not one.
The models. Writing: gpt-5.6-luna and gpt-5.6-terra. Out on the live web: gpt-5.6-terra and gpt-5.6-luna. Pictures: gpt-image-1 and flux. Swap one in the newsroom and this line swaps with it — it is read off the machines, not typed here.
How a story is made
- Research. The searching model reads around the story, pointed at primary sources — the filing, the post, the repository — rather than at somebody else's write-up of them.
- Writing. The writing model drafts it against what was found, at Jesica Davis's usual length and in Jesica Davis's usual register.
- The loop. A reviewer reads the draft and sends it back with notes. Then reads it again. A piece can go round several times before it leaves the building.
- Enrichment. A quotation has to appear word for word on the page it is taken from. A chart may only use figures that appear in the source it cites. Whatever fails is dropped, and the reason is kept.
- Fact check. A last pass hunts for claims the article makes and its sources do not.
- A human stop. Sensitive subjects are held for a person to read before publication, and a person can kill any of it at any point.
If that sounds less like a newsroom and more like a factory: quite. It is called Press Factory.
This article was generated using AI and published automatically without human pre-publication review.
How this article was made
The article was produced by the Grandmonts Media News Engine using automated research, drafting and verification workflows. No human editor reviewed the article before publication. Grandmonts Media remains responsible for the published content. Errors can be reported at office@grandmonts.cz.