US Treasury Proposes Digital ID Integration in DeFi to Strengthen AML Compliance

The U.S. Treasury, under Secretary Janet Yellen, has launched a public consultation on the integration of digital identity verification into decentralized finance (DeFi) platforms, with a focus on automating compliance for anti-money laundering (AML) and know-your-customer (KYC) standards [1]. This initiative, part of the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), aims to explore the feasibility of embedding digital identity checks directly into smart contracts. The consultation period remains open until October 17, 2025, and invites input from a wide range of stakeholders, including financial institutions, technology firms, and industry experts [2].

The proposal envisions a framework where digital identity credentials are integrated into DeFi protocols, enabling automatic verification before a transaction is executed. This could significantly reduce the risk of illicit financial activities while supporting innovation in the digital asset space [3]. By leveraging technologies such as artificial intelligence (AI), application programming interfaces (APIs), and blockchain monitoring tools, the Treasury seeks to enhance the detection of suspicious transactions and ensure that DeFi platforms adhere to regulatory standards.

A core objective of the consultation is to assess how digital identity systems can be applied in a decentralized context, where traditional identity verification mechanisms are less effective [4]. The Treasury is particularly interested in understanding the operational and privacy challenges associated with such integration, as well as how these tools can be scaled across decentralized networks without compromising user anonymity. The initiative also emphasizes the importance of balancing innovation with oversight, aiming to create a regulatory environment that supports both security and technological advancement [5].

Industry observers note that the proposed system could lead to a fundamental shift in DeFi market dynamics. By embedding compliance directly into smart contracts, the Treasury aims to reduce the burden on financial institutions while increasing transparency in digital transactions [6]. However, the implementation of such a system raises concerns about scalability and the potential impact on user privacy. Existing DeFi protocols, such as Aave, Maker, and Uniswap, have not yet responded to the proposal, and their potential adoption of the framework remains uncertain [7].

Public input will play a critical role in shaping the final regulatory approach. The Treasury has encouraged stakeholders to provide detailed feedback on technical, operational, and regulatory challenges, including cybersecurity risks and data privacy concerns [8]. The outcome of this consultation is expected to inform future legislative proposals and regulatory guidance, potentially influencing the broader digital asset ecosystem.

The initiative reflects a broader trend toward automated compliance in financial markets, driven by regulatory and technological advancements. By integrating digital identity verification into DeFi systems, the U.S. Treasury aims to foster a secure and transparent digital asset environment while addressing the unique challenges of decentralized networks [9].

[1] title1: US Treasury Considers Digital ID in DeFi to Curb Illicit ... (url1: https://cointelegraph.com/news/us-treasury-digital-id-defi-illicit-finance)

[2] title2: U.S. Treasury Explores Digital ID Verification in DeFi to ... (url2: https://www.ainvest.com/news/treasury-explores-digital-id-verification-defi-strengthen-aml-enforcement-2508/)

[3] title3: US Treasury Considers Digital Ids In Defi To Combat ... (url3: https://menafn.com/1109938222/US-Treasury-Considers-Digital-Ids-In-Defi-To-Combat-Financial-Crimes)

[4] title4: 2025-15697.pdf (url4: https://public-inspection.federalregister.gov/2025-15697.pdf)

[5] title5: Request for Comment on Innovative Methods To Detect ... (url5: https://www.federalregister.gov/documents/2025/08/18/2025-15697/request-for-comment-on-innovative-methods-to-detect-illicit-activity-involving-digital-assets)

[6] title6: The US Treasury is considering introducing digital identity ... (url6: https://www.mexc.com/news/the-us-treasury-is-considering-introducing-digital-identity-verification-in-defi-to-combat-illicit-financing/65617)

[7] title7: US Treasury Weighs Digital ID Verification in DeFi to Tackle ... (url7: https://www.tradingview.com/news/cointelegraph:0e244adeb094b:0-us-treasury-weighs-digital-id-verification-in-defi-to-tackle-illicit-finance/)

[8] title8: U.S. Treasury Proposes Digital ID System to Regulate DeFi ... (url8: https://www.ainvest.com/news/treasury-proposes-digital-id-system-regulate-defi-combat-financial-crime-2508/)