Consultation under the GENIUS Act considers embedding compliance tools directly into smart contracts
The US Department of the Treasury is weighing whether digital identity verification could be built into decentralized finance (DeFi) protocols as part of its wider effort to combat illicit finance in crypto markets. The proposal comes under the recently enacted Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, which sets the regulatory foundation for payment stablecoin issuers.
The Treasury this week opened a public consultation, asking for feedback on emerging technologies such as artificial intelligence, blockchain monitoring, and identity credentials that might strengthen Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.
One of the most debated ideas is the possibility of embedding digital identity checks directly into smart contracts. Under this model, DeFi transactions could only execute once a user’s credential — such as a government-issued ID, biometric marker, or portable identity token — has been verified. Supporters argue this could automate compliance while protecting user privacy.
“Embedding KYC at the protocol level could transform how compliance works in DeFi,” said a Washington-based policy analyst. “It reduces manual oversight and helps regulators feel more confident about the ecosystem.”
Balancing compliance with privacy
The Treasury noted that digital ID solutions could cut compliance costs for institutions while making it easier to identify money laundering, terrorist financing, or sanctions evasion before funds move. However, it also flagged data privacy risks and the challenge of maintaining innovation.
“The key is finding the right balance,” said a senior blockchain researcher. “You want safeguards against bad actors, but without undermining the openness and permissionless nature that makes DeFi valuable.”
Next steps in regulatory roadmap
Public comments are open until October 17, 2025, after which Treasury will compile feedback, report findings to Congress, and potentially propose new rules. The consultation signals how the US is preparing for a future where stablecoins and DeFi services could become integral to mainstream finance.
By embedding compliance tools directly into blockchain infrastructure, regulators hope to ensure security and trust without stifling innovation.
Disclaimer
This content is for informational purposes only and does not constitute financial, investment, or legal advice. Cryptocurrency trading involves risk and may result in financial loss.