The US Department of the Treasury is seeking public feedback on how digital identity tools can be used to fight illicit finance in crypto markets. The consultation, published this week, stems from the recently enacted GENIUS Act, which sets out a regulatory framework for payment stablecoin issuers.
One idea being explored is embedding identity checks into decentralized finance (DeFi) smart contracts. Under this model, a smart contract could automatically verify a user’s credentials before executing a transaction, effectively building Know Your Customer (KYC) and Anti-Money Laundering (AML) safeguards into blockchain infrastructure.
The Treasury believes that digital identity solutions, which may include government IDs, biometrics or portable credentials, could reduce compliance costs while strengthening privacy protections. These solutions could also make it easier for financial institutions and DeFi services to detect money laundering, terrorist financing, or sanctions evasion before transactions occur.
However, the Treasury acknowledges potential challenges, including data privacy concerns and the need to balance innovation with regulatory oversight. The public has until October 17, 2025, to submit their comments on this proposal.
Source: https://cointelegraph.com/news/us-treasury-digital-id-defi-illicit-finance