U.S. Treasury Proposes Digital ID System to Regulate DeFi and Combat Financial Crime

The U.S. Treasury is exploring the implementation of a government-backed digital identity verification system to regulate the rapidly evolving decentralized finance (DeFi) sector, with the aim of curbing financial crimes and improving compliance. In a recent address at American University’s Washington College of Law, Treasury Secretary Janet Yellen outlined the potential for a digital ID framework to serve as a critical tool in verifying identities in digital financial transactions, thereby reducing opportunities for illicit activities such as fraud and money laundering [1]. The initiative is seen as part of a broader regulatory push to modernize financial oversight for digital assets, ensuring that innovation does not outpace accountability [2].

Under this proposed system, digital identity tools could be adopted by regulated financial intermediaries to strengthen customer onboarding processes while maintaining the efficiency of digital transactions. These systems would operate within the existing legal and regulatory infrastructure, with the possibility of being enforced by agencies like the Financial Crimes Enforcement Network (FinCEN). The collaboration between the Treasury and these regulatory bodies signals a coordinated effort to align technological advancements with the goals of financial stability and security [3].

Industry stakeholders, including major financial institutions and technology firms, have also been investigating digital identity solutions. For instance, a recent U.S. Treasury repo transaction executed by a consortium including Bank of America, Citadel Securities, and DTCC demonstrated the feasibility of integrating such systems into real-world financial operations. This development highlights the growing technical capacity to implement digital identity measures in live environments, supporting the Treasury’s vision for a more transparent and secure financial landscape [4].

The initiative has also prompted the Treasury to open a public comment period, inviting input from a broad range of stakeholders, including financial institutions, technology developers, and civil society groups. This engagement reflects an effort to build a balanced regulatory framework that supports innovation while upholding the integrity of the financial system. The feedback received will likely influence the final design of the proposed system, ensuring it addresses key concerns from both regulators and market participants [5].

Analysts have noted that the adoption of digital identity systems in DeFi could have far-reaching implications for the future of digital finance. While the system is expected to enhance trust among investors and reduce the risk of scams, some in the crypto community have expressed concerns that increased government oversight could limit innovation and privacy. The challenge lies in maintaining the delicate balance between regulatory compliance and technological freedom, ensuring that the system fosters secure financial interactions without stifling the development of new blockchain-based services [1].

As the global financial landscape continues to integrate digital assets, the U.S. Treasury’s move represents a proactive approach to shaping the future of financial regulation. The initiative is likely to influence similar efforts in other jurisdictions, as governments worldwide seek ways to address the risks associated with anonymity in digital transactions. The evolving regulatory environment will play a crucial role in determining how DeFi and blockchain technologies are governed in the years to come [2].

Source:

[1] 2025-15697.pdf (https://public-inspection.federalregister.gov/2025-15697.pdf)

[2] S-1 (https://www.sec.gov/Archives/edgar/data/2055510/0000950170****9442/ck0002055510-20250815.htm)

[3] JUST IN: Digital Asset and a consortium including Bank of America, Citadel Securities, and DTCC have completed an on-chain U.S. Treasury repo transaction... (https://www.facebook.com/groups/224908980871348/posts/2499157****111065/)

[4] Risk Insights Resource Center (https://www.garp.org/risk-insights-resources)

[5] Blockchain | StartupNews.fyi - Startup & Technology News (https://startupnews.fyi/category/blockchain/)