U.S. Treasury Floats Digital ID Checks in Fight Against Illicit Crypto Flows

The U.S. Treasury Department is seeking public input on how digital identity tools and emerging technologies could be built into crypto infrastructure to crack down on illicit finance — including a proposal to embed identity checks directly into decentralized finance (DeFi) smart contracts.

The consultation, published this week, stems from the GENIUS Act, the stablecoin law signed by President Donald Trump in July that requires regulators to explore compliance technologies for digital assets.

One option under review is integrating digital identity credentials into DeFi protocols. In practice, that would mean a smart contract automatically verifying a user’s ID before a transaction is executed, embedding Know Your Customer (KYC) and Anti-Money Laundering (AML) checks into the blockchain itself.

Digital IDs as a Compliance Tool

Treasury said digital identity systems — ranging from government IDs and biometrics to portable credentials — could cut compliance costs while giving banks and DeFi services stronger tools to detect money laundering, terrorist financing, and sanctions evasion.

But it also acknowledged challenges, such as safeguarding privacy and balancing regulatory oversight with space for innovation. “Treasury welcomes input on any matter that commenters believe is relevant,” the agency said.

Public comments will remain open until Oct. 17, 2025. After the consultation, Treasury will submit a report to Congress and may issue new guidance or rules.

The request comes as banks lobby lawmakers to tighten stablecoin regulations. Last week, the Bank Policy Institute warned that a loophole in the GENIUS Act could allow issuers to offer interest through affiliates, potentially diverting as much as $6.6 trillion in deposits from the banking system.

While the U.S. weighs digital ID frameworks, other jurisdictions have moved more swiftly. Switzerland expanded its DLT Act in April to let banks custody tokenized securities, and the FDIC in March gave U.S. banks more room to pursue crypto without prior approval.