The U.S. Department of the Treasury plans to introduce digital identity verification in DeFi to combat illegal financing

According to reports, the U.S. Department of the Treasury is seeking public feedback on how to use digital identity tools and other emerging technologies to combat illegal financing in the cryptocurrency market. One proposal is to embed identity verification into DeFi smart contracts. According to the Treasury, digital identity solutions (which may include government-issued IDs, biometric technology, or portable credentials) could reduce compliance costs while enhancing privacy protection. They may also make it easier for financial institutions and DeFi services to detect money laundering, terrorism financing, or sanctions evasion before transactions occur. One idea in the consultation draft is that DeFi protocols could directly integrate digital identity credentials into their code. In this model, smart contracts could automatically verify a user's credentials before executing a transaction, effectively building KYC and anti-money laundering (AML) safeguards into the blockchain infrastructure. This consultation report stems from the new (Guidance and Establishment of the U.S. Stablecoin National Innovation Act) (GENIUS Act), which was signed into law in July.