U.S. Treasury Consults on Digital Identity in Crypto to Strengthen AML Compliance

The U.S. Department of the Treasury has launched a public consultation on the use of digital identity technologies in the cryptocurrency sector, aiming to bolster regulatory compliance and mitigate illicit financial activity. This initiative, prompted by the GENIUS Act, encourages input on how emerging technologies, including artificial intelligence, can be integrated into crypto oversight mechanisms. A key proposal involves embedding digital identity verification directly into decentralized finance (DeFi) smart contracts, allowing for real-time compliance checks without relying solely on centralized exchanges or banks [1].

The initiative reflects the Treasury’s broader strategy to adapt regulatory tools to the evolving nature of digital finance. By integrating identity verification into the core of blockchain transactions, the agency seeks to enforce Know Your Customer (KYC) and Anti-Money Laundering (AML) standards at the protocol level. This could streamline compliance processes for institutions while reducing the risk of fraud, money laundering, and other financial crimes [2].

Public feedback is central to the consultation, with stakeholders invited to submit views by October 17, 2025. The Treasury acknowledges the complexity of balancing privacy rights with regulatory oversight. A core challenge lies in ensuring that digital identity systems neither compromise user confidentiality nor hinder innovation in the crypto space. The agency’s report to Congress and potential rulemaking will be shaped by this input, making the consultation a pivotal step in the future of crypto regulation [4].

The initiative also highlights growing tensions between traditional financial institutions and the crypto industry. Banking groups have raised concerns that current regulatory frameworks may allow stablecoin issuers to offer interest-bearing products without adequate safeguards. They argue this could divert trillions of dollars away from traditional banks, potentially affecting credit availability and broader financial stability [3].

The Treasury’s approach marks a significant shift in U.S. policy toward crypto governance, emphasizing collaboration between regulators, technologists, and market participants. It underscores the administration’s aim to lead in digital asset innovation while ensuring that new technologies operate within a secure and transparent framework [5].

Source:

[1] https://thecoinrise.com/u-s-treasury-opens-public-debate-on-digital-identity-in-crypto-rules/

[2] https://www.ainvest.com/news/treasury-proposes-digital-id-verification-defi-strengthen-aml-compliance-2508/

[3] https://www.biometricupdate.com/202508/biometric-borders-and-business-make-strange-bedfellows

[4] https://www.federalregister.gov/documents/2025/08/18/2025-15697/request-for-comment-on-innovative-methods-to-detect-illicit-activity-involving-digital-assets

[5] https://www.coinlive.com/news-flash/872783