U.S. Treasury Proposes Digital ID Verification in DeFi to Strengthen AML Compliance

The U.S. Treasury, under the leadership of Secretary Janet Yellen, is advancing a proposal to integrate digital identity verification into decentralized finance (DeFi) smart contracts. The initiative, part of the broader GENIUS Act consultation, aims to automate know-your-customer (KYC) and anti-money laundering (AML) processes within DeFi protocols. By embedding identity verification directly into the infrastructure, the Treasury seeks to reduce the risk of illicit financial activity and enhance transparency in a sector known for its pseudonymity [1].

The consultation, which is open until October 17, 2025, invites feedback from DeFi experts, technologists, and financial institutions. The proposal outlines potential solutions, including the use of APIs, artificial intelligence, and blockchain-based identity systems. These tools could be integrated to verify user identities using government-issued IDs, biometric data, or portable digital credentials [2]. The Treasury has emphasized the need for scalable solutions that do not impose excessive friction on decentralized protocols, while also ensuring robust privacy protections [3].

The proposal builds on previous U.S. regulatory actions, such as the Financial Action Task Force (FATF) guidelines, which increased compliance pressures on DeFi protocols. Earlier efforts led to declines in total value locked (TVL) and prompted some platforms to migrate to more transparent environments [4]. If implemented, the new framework could require major DeFi platforms such as Aave and Uniswap to update their infrastructure to meet regulatory expectations, potentially affecting liquidity and TVL metrics [5].

Industry stakeholders are currently engaged in discussions around the implications of the proposal. While some developers express concerns over the potential conflict between regulatory compliance and decentralization principles, others acknowledge the necessity of adapting to evolving financial oversight [6]. The challenge lies in maintaining the core tenets of DeFi—decentralization and anonymity—while meeting the increasing demand for accountability and transparency.

The Treasury’s approach reflects a broader strategy to modernize AML frameworks in response to the rapid evolution of digital assets. By engaging with a wide range of stakeholders, the agency aims to develop a balanced regulatory approach that addresses risks without stifling innovation [7]. The outcome of the consultation will likely influence the future governance of DeFi and set a precedent for regulatory engagement in the digital finance space.

Source:

[1] US Treasury Considers Digital ID in DeFi to Curb Illicit ...

https://cointelegraph.com/news/us-treasury-digital-id-defi-illicit-finance

[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 explores on chain ID checks for DeFi under ...

https://web.ourcryptotalk.com/blog/us-treasury-explores-on-chain-id-checks-for-defi-under-genius-act-review

[4] US Treasury weighs digital ID verification in DeFi to tackle ...

https://www.tradingview.com/news/cointelegraph:0e244adeb094b:0-us-treasury-weighs-digital-id-verification-in-defi-to-tackle-illicit-finance/

[5] US Treasury open to enforcing digital ID verification in DeFi

https://www.mitrade.com/insights/news/live-news/article-3-1046003-20250817

[6] The US Treasury is considering introducing digital identity ...

https://www.mexc.com/news/the-us-treasury-is-considering-introducing-digital-identity-verification-in-defi-to-combat-illicit-financing/65617

[7] US Treasury Proposes Digital ID Integration in DeFi to ...

https://www.ainvest.com/news/treasury-proposes-digital-id-integration-defi-strengthen-aml-compliance-2508/