The U.S. Treasury is exploring the possibility of adding digital identity verification to decentralized finance (Digital ID for DeFi) to combat illegal financial activities like money laundering.
This is part of the public consultation under the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act), signed into law in July 2025 by the Trump Administration.
Accordingly, the public will give input on how technologies like digital IDs, artificial intelligence, and blockchain monitoring can improve safety in cryptocurrency markets.
One of the key proposals is to embed identity checks into DeFi smart contracts, which are self-executing programs on blockchains. This includes confirming a user’s identity before a transaction, incorporating Know Your Customer (KYC) and Anti-Money Laundering (AML) protections directly into the blockchain.
The compliance with GENIUS Act
The GENIUS Act provides a regulatory framework for stablecoin issuers, whose digital currencies are backed by assets like the U.S. dollar.
The Treasury suggests that digital IDs, such as government IDs, biometrics, or secure digital credentials, could reduce compliance costs for DeFi platforms and banks.
Digital verification could also help detect terrorist financing or sanctions evasion, while safeguarding user privacy.
The Treasury acknowledges potential challenges like balancing data privacy and regulations that support innovation. It is accepting public comments until October 17, 2025.
After the consultation, the Treasury will submit a report to Congress and may issue new guidance or rules.
Meanwhile, separately, major U.S. banks, led by the Bank Policy Institute (BPI), expressed concerns about a loophole in the GENIUS Act. In a letter, they said stablecoin issuers might partner with exchanges to offer interest payments, bypassing the law’s restrictions.
However, the Treasury’s focus on digital ID for DeFi highlights their interest in secure crypto markets while addressing emerging financial risks that come with blockchain technology.
