The U.S. Department of the Treasury is considering integrating identity verification directly into decentralized finance smart contracts (#defi ). This initiative could fundamentally change the foundations of constraint-free financing.
Last week, the agency opened consultations under the U.S. Stablecoins Guidance and National Innovation Act (GENIUS Act), signed in July. The law mandates the department to assess new compliance tools to combat illegal financial activities in cryptocurrency markets.
Built-in identification in blockchain
One idea is to embed identification data directly into smart contracts. The DeFi protocol would be able to automatically verify a user's government ID, biometric data, or digital wallet certificate before allowing a transaction.
Integrating 'know your customer' (KYC) and anti-money laundering (AML) checks into blockchain infrastructure could streamline compliance and prevent criminals from entering DeFi.
"Cameras in every living room"
The proposal risks hollowing out the very essence of DeFi. The plan is akin to placing cameras in every living room. It transforms neutral, unconstrained infrastructure into one where access is limited by government identification.
If biometric or government IDs are tied to blockchain wallets, every transaction risks becoming permanently traceable to a real person. As a result, anonymity and the ability to conduct transactions without surveillance are lost.
Exclusion from the system
Billions of people around the world lack official documentation. If DeFi protocols require government identification, entire communities, migrants, refugees, and unbanked individuals risk being left out.
Linking biometric databases with financial activity could make breaches more catastrophic, putting both money and identity at risk in a single leak.
Alternative solutions
Privacy protection tools such as zero-knowledge proofs (ZKP) and decentralized identity standards (DID) offer ways to verify compliance without revealing full identity.
With ZKP, users can prove they are not on sanctions lists or that they are over 18 without disclosing their identity.
Embedding identification at the protocol level undermines financial freedom and creates dangerous precedents. Governments could censor transactions, blacklist wallets, or even automate tax collection directly through smart contracts.
Integrating mandatory identity checks into DeFi protocols could significantly change the landscape of the cryptocurrency industry.
