U.S. Treasury Proposes AML Framework for DeFi via Smart Contracts

The U.S. government is moving to impose a comprehensive regulatory framework on decentralized finance (DeFi), signaling a major shift in how the sector is perceived and governed. At the heart of the effort is the U.S. Treasury, which has initiated a public consultation process under the GENIUS Act, signed in July 2024, to integrate compliance mechanisms directly into DeFi smart contracts [1]. This initiative aims to bring DeFi platforms under the same anti-money laundering (AML) and counter-terrorist financing (CTF) frameworks that apply to traditional financial institutions.

According to the official notice, the U.S. Treasury is proposing the use of “wearable digital identifiers” to verify user identities before any DeFi transaction is validated. These identifiers, which can include biometrics or government-issued digital credentials, are intended to be embedded in smart contracts to enforce compliance in real-time [1]. The initiative also involves the use of artificial intelligence, surveillance APIs, and blockchain analysis tools to strengthen oversight [1].

While the Treasury acknowledges that these tools may initially impose additional burdens on financial institutions due to integration costs and the need for new expertise, the overarching goal is to ensure that DeFi does not become a haven for illicit activities such as money laundering, sanctions evasion, and ransomware financing [1]. The proposed framework reflects a broader effort to align DeFi with regulatory standards, ensuring that innovation does not come at the expense of financial integrity.

The consultation period for the initiative, which opened on August 18, 2025, is open until October 17, 2025, during which the Treasury will gather input from stakeholders across the crypto industry [1]. The proposal is expected to affect all platforms offering DeFi services in the U.S., marking a significant departure from the traditionally unregulated nature of the sector.

The move has sparked mixed reactions within the crypto community. Critics argue that embedding KYC (Know Your Customer) requirements into smart contracts could undermine the very essence of DeFi—decentralization and privacy. Some fear that this could set a dangerous precedent, prompting other countries to adopt similar measures and ultimately stifling innovation [1]. Conversely, traditional financial institutions and regulatory bodies, including the Bank Policy Institute, have welcomed the initiative as a necessary step to close regulatory loopholes and prevent DeFi from becoming a threat to the stability of the financial system [1].

As the U.S. seeks to impose a more structured legal framework on DeFi, the success of the initiative will depend on its ability to strike a balance between innovation and compliance. The sector has already seen infrastructure advancements, such as Uniswap’s launch of Unichain, a layer-2 solution designed to improve scalability and reduce costs [2]. These developments suggest that DeFi can evolve in a way that supports both regulatory requirements and user accessibility.

The U.S. approach reflects a broader trend of integrating regulatory oversight into the technological architecture of financial systems. If successful, it could serve as a model for other jurisdictions seeking to manage the risks associated with decentralized finance while fostering innovation. The coming months will be critical as the public consultation period concludes and the Treasury moves toward finalizing its proposals.

[1] https://coinmarketcap.com/community/articles/68a2f030c5c06c674880b2ad/

[2] https://cryptodnes.bg/en/tag/stablecoin/page/9/