#CryptoIntegration The U.S. Treasury studies digital identity verification in DeFi to combat illicit finance.

The Treasury is considering incorporating digital identity controls in DeFi smart contracts as part of its consultation on the GENIUS Act regarding compliance tools in cryptocurrency.

The U.S. Department of the Treasury is gathering public opinions on how digital identity tools and other emerging technologies could be used to combat illicit finance in cryptocurrency markets, with one option being the incorporation of identity verifications in the smart contracts of decentralized finance (DeFi).

The consultation, published this week, stems from the newly enacted U.S. Stablecoin Innovation and Establishment Act (GENIUS Act), which came into effect in July.

The law, which establishes a regulatory framework for payment stablecoin issuers, directs the Treasury to explore new compliance technologies, including application programming interfaces (APIs), artificial intelligence, digital identity verification, and blockchain monitoring.

One of the ideas in the request for comments is the possibility for DeFi protocols to integrate digital identity credentials directly into their code. Under this model, a smart contract could automatically verify a user's credentials before executing a transaction, effectively incorporating “Know Your Customer” (KYC) and anti-money laundering (AML) protections into the blockchain infrastructure.