U.S. Treasury Seeks Digital Identity Integration in DeFi Under GENIUS Act

The U.S. Treasury is examining the integration of digital identity verification into decentralized finance (DeFi) smart contracts as part of its efforts under the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act). This initiative aims to improve compliance, reduce illicit financial activities, and strengthen regulatory oversight in the crypto market. By embedding identity checks directly into DeFi protocols, the Treasury seeks to enforce Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements at the infrastructure level, ensuring that transactions are only executed after verified user credentials are presented [1].

The GENIUS Act, enacted in July, mandates the Treasury to investigate emerging compliance technologies, including digital identity tools, blockchain monitoring, and artificial intelligence. These innovations are expected to streamline compliance processes for financial institutions, reduce operational costs, and enhance detection mechanisms for money laundering, terrorist financing, and sanctions evasion [1]. Digital identity solutions could potentially incorporate government-issued IDs, biometric data, or other portable credentials, offering a secure and efficient means to authenticate users without compromising privacy.

One of the key aspects of this initiative is the open call for public feedback, which remains open until October 17, 2025. The Treasury has invited stakeholders, including DeFi developers, financial institutions, and regulatory bodies, to contribute insights on the feasibility, risks, and benefits of embedding identity verification into smart contracts. This consultation period is crucial for shaping the future regulatory landscape and ensuring that the proposed measures support innovation while maintaining security and transparency [1].

The Treasury also acknowledged potential challenges associated with this approach, such as data privacy concerns and the need to strike a balance between fostering technological advancement and enforcing regulatory requirements. These challenges underscore the complexity of integrating digital identity verification into decentralized systems, which are often designed to minimize reliance on centralized authorities.

Separately, the Bank Policy Institute (BPI) and other banking groups have raised concerns about potential regulatory loopholes under the GENIUS Act. In a recent letter to Congress, the BPI warned that current provisions may allow stablecoin issuers to bypass restrictions on offering interest-bearing accounts, which could destabilize traditional banking systems. The group estimates that unregulated yield-bearing stablecoins could lead to significant deposit outflows, potentially reaching up to $6.6 trillion, and could hinder credit availability for businesses [1].

As the Treasury continues its review, the proposed integration of digital identity tools into DeFi represents a pivotal step toward enhancing the security and regulatory compliance of crypto markets. The outcome of this consultation will likely influence the development of future guidance and potential new rules in the fast-evolving digital asset landscape [1].

Source: [1] [Treasury Explores Digital Identity Integration in DeFi Under GENIUS Act for Enhanced Compliance and Security](https://en.coinotag.com/treasury-explores-digital-identity-integration-in-defi-under-genius-act-for-enhanced-compliance-and-security/)