The US Treasury Department is actively considering innovative approaches to enhance financial oversight in decentralized finance (DeFi) ecosystems, with digital identity verification emerging as a potential solution to address money laundering and other illicit activities.

Smart Contracts May Get Built-in Compliance Features

As part of its GENIUS Act implementation efforts, the Treasury has opened a public consultation exploring how emerging technologies could strengthen crypto market oversight. One notable proposal involves embedding Know Your Customer (KYC) and Anti-Money Laundering (AML) checks directly into DeFi smart contracts through digital identity verification systems.

This approach would require protocols to automatically validate user credentials before processing transactions, potentially transforming compliance from an external requirement to an inherent protocol feature. The Treasury suggests this could reduce costs while maintaining privacy protections through technologies like government-issued digital IDs or biometric verification.

Balancing Innovation and Regulation

While acknowledging the potential benefits, Treasury officials recognize significant challenges in implementation. The consultation document specifically requests input on privacy concerns and the appropriate balance between innovation and regulatory oversight. Public comments will be accepted until October 17, 2025, with findings potentially shaping future guidance or rulemaking.

Notably, the initiative comes as US banking groups raise concerns about potential loopholes in the newly enacted GENIUS Act. Industry representatives warn that certain provisions might allow stablecoin issuers to circumvent interest payment restrictions, potentially triggering 【$6.6 trillion】 in bank deposit outflows.

Broader Implications for Crypto Compliance

This development marks a significant shift in regulatory strategy, moving beyond traditional exchange-focused oversight to address compliance at the protocol level. ——The approach could fundamentally change how DeFi platforms operate—— while setting new global standards for crypto regulation.

The Treasury's exploration of digital identity solutions reflects growing recognition that combating financial crime in decentralized ecosystems requires equally innovative technological solutions. As the consultation progresses, industry participants will be watching closely to see how these proposals might reshape the future of financial privacy and compliance in Web3.