U.S. Treasury Explores Digital ID Verification in DeFi to Strengthen AML Enforcement

The U.S. Treasury is exploring the integration of digital identity verification into decentralized finance (DeFi) platforms to combat illicit financial activities [1]. This initiative, part of a broader effort to modernize anti-money laundering (AML) and sanctions enforcement, comes amid growing concerns about the anonymity and regulatory challenges posed by digital assets. The department has issued a public request for comment on emerging technologies, including digital identity verification, APIs, artificial intelligence, and blockchain monitoring, to improve detection and mitigation of financial crimes [2].

The initiative is mandated under the recently enacted GENIUS Act, which requires the Treasury to evaluate how emerging technologies can be used by financial institutions to detect illicit digital asset activity. The Act specifically emphasizes the importance of digital identity verification as a potential tool to enhance compliance and reduce the risks associated with anonymous transactions [2]. The U.S. government is considering embedding identity checks directly into DeFi smart contracts, enabling platforms to verify user identities before executing transactions. This would effectively integrate Know Your Customer (KYC) and AML safeguards into the blockchain infrastructure itself [3].

The proposed digital identity solutions could include government-issued IDs, biometric data, or portable digital credentials, which could help reduce compliance costs while maintaining user privacy [2]. These tools may also empower DeFi services and traditional financial institutions to detect money laundering, terrorism financing, and sanctions evasion before transactions occur. However, the Treasury is also seeking input on the potential challenges, such as data privacy concerns and the need to balance innovation with regulatory oversight [1].

The public consultation, which remains open until October 17, invites stakeholders to share their views on how digital identity tools are currently being used, the challenges encountered, and potential improvements or regulatory changes [3]. The feedback will inform the Treasury’s future guidance and possible legislative proposals. This move reflects a growing recognition that traditional AML frameworks are insufficient to address the evolving risks in the digital asset space, where illicit actors increasingly exploit DeFi platforms to evade detection.

The initiative signals a shift in regulatory focus toward proactive and technology-driven compliance measures. By embedding identity verification into the infrastructure of DeFi, the U.S. aims to close regulatory gaps while supporting innovation. The outcome of this consultation could significantly shape how DeFi platforms operate, particularly in terms of compliance design and regulatory engagement.

Source:

[1] US Treasury mulls digital ID verification in DeFi to curb ... (https://www.cryptopolitan.com/us-treasury-digital-id-verification/)

[2] Request for Comment on Innovative Methods To Detect ... (https://www.federalregister.gov/documents/2025/08/18/2025-15697/request-for-comment-on-innovative-methods-to-detect-illicit-activity-involving-digital-assets)

[3] US Treasury opens public consultation on digital IDs in ... (https://tradersunion.com/news/cryptocurrency-news/show/440379-u-s-treasury-opens-public-consultation/)