Digital identity verification is being weighed up as a mechanism hardwired into decentralized finance (DeFi) systems to control financial related crime.
With the potential to reduce illicit activities supported by the U.S. Treasury Secretary, Janet Yellen, the open-access nature of the sector could be drastically “altered”, said some news outlets, changing permissionless onboarding.
The whole inquiry into the idea was mapped out in July’s Guiding and Establishing National Innovation for US Stablecoins Act, in which the Treasury participated in the consultation process and asked for commentary on permitting KYC and AML checks to be woven into the DeFi code.
While the law primarily sets standards for stablecoin issuers, it also directs regulators to examine advanced tools including, AI, blockchain analytics, APIs, and digital credentials, to curb money laundering and other illicit activity in crypto markets.
“Compliance by design” is considered one of the most controversial concepts under review because of its automation of checks, making privacy aspects of using DeFi protocols anonymously difficult. Transactions could only proceed if a user’s digital ID met established requirements, such as tied to government records, biometrics, or a secure digital wallet.
The Treasury argues the contrary that digital identity systems actually enhance privacy but regulators are on the side of a public review which would solidify the rules the Treasury provides to Congress.
The consultation process remains open until October 17, 2025.
The consultation coincides with growing pressure from U.S. banks. The Bank Policy Institute and other trade groups recently cautioned lawmakers that loopholes in the GENIUS Act could allow stablecoin firms to offer yield-bearing products through affiliates, potentially pulling trillions of dollars from the traditional banking system and straining credit markets.
Get the latest identity news and engage with the industry at Identity Week America (10-11 September) – sign up today!
