The U.S. Treasury Department has launched a public consultation on integrating digital identity verification directly into decentralized finance (DeFi) protocols, aiming to embed Know Your Customer (KYC) and Anti-Money Laundering (AML) checks within smart contracts. This initiative stems from the GENIUS Act signed by President Trump in July 2025, which mandates regulators to develop compliance technologies for digital assets.
Under the proposal, smart contracts would automatically verify user identities using government-issued IDs, biometrics, or portable credentials before executing transactions. The Treasury's Office of Terrorist Financing and Financial Crimes (TFFC) highlighted that such systems could reduce compliance costs while combating money laundering, terrorist financing, and sanctions evasion—noting that actors like North Korea and cybercriminals exploit DeFi services to launder illicit proceeds.
Public comments are open until October 17, 2025, after which the Treasury will submit recommendations to Congress. The move coincides with banking industry pressure to close a $6.6 trillion deposit diversion loophole in stablecoin regulations under the GENIUS Act. While the U.S. deliberates, jurisdictions like Switzerland have advanced tokenization frameworks, and the FDIC recently expanded U.S. banks' crypto custody permissions.
