In this paper, a novel algorithm for bandwidth reduction in adaptive distributed learning is introduced. We deal with diffusion networks, in which the nodes cooperate with each other, by exchanging information, in order to estimate an unknown parameter vector of interest. We seek for solutions in the framework of set theoretic estimation. Moreover, in order to reduce the required bandwidth by the transmitted information, which is dictated by the dimension of the unknown vector, we choose to project and work in a lower dimension Krylov subspace. This provides the benefit of trading off dimensionality with accuracy. Full convergence properties are presented, and experiments, within the system identification task, demonstrate the robustness of the algorithmic technique.