The US Treasury is considering introducing digital identity verification in DeFi to combat illicit financing.

PANews reported on August 17th that, according to Cointelegraph, the U.S. Treasury Department is seeking public feedback on how to use digital identity tools and other emerging technologies to combat illicit financing in the cryptocurrency market. One proposal involves embedding identity verification into DeFi smart contracts. According to the Treasury, digital identity solutions (which could include government ID cards, biometrics, or portable credentials) can reduce compliance costs while strengthening privacy protections. They can also make it easier for financial institutions and DeFi services to detect money laundering, terrorist financing, or sanctions evasion before transactions occur.

One idea proposed in the draft is that DeFi protocols could integrate digital identity credentials directly into their code. In this model, smart contracts could automatically verify users’ credentials before executing transactions, effectively building Know Your Customer (KYC) and Anti-Money Laundering (AML) safeguards into the blockchain infrastructure.

The advisory report, released this week, stems from the newly enacted Guiding and Establishing a National Innovation for Stablecoins in the United States Act (GENIUS Act), which was signed into law in July.