The US Treasury is seeking public feedback on digital identity tools and emerging technologies to combat illicit activity in crypto markets.
Released on Monday, the consultation follows the GENIUS Act, signed into law in July. The law creates a regulatory framework for payment stablecoin issuers and directs Treasury to explore new compliance technologies. These include APIs, artificial intelligence, digital identity verification, and blockchain monitoring.
One proposal in the request for comment would embed digital identity checks into DeFi smart contracts. Under this approach, a smart contract could verify a user’s credentials before processing a transaction.
This would effectively build KYC and AML safeguards directly into blockchain infrastructure. Treasury says such digital identity solutions could include government IDs, biometrics, or portable credentials.
Furthermore, they could reduce compliance costs while strengthening privacy protections. They could also help banks and DeFi services detect money laundering, terrorist financing, or sanctions evasion before transactions occur.
Treasury has also acknowledged the potential challenges. These include privacy concerns and the need to balance innovation with oversight.
“Treasury welcomes input on any matter that commenters believe is relevant,” the agency wrote.
Public comments remain open until October 17, 2025. Afterward, Treasury will submit a report to Congress and may issue guidance or propose new rules.
Meanwhile, major US banking groups, led by the Bank Policy Institute, urged Congress to tighten rules under the GENIUS Act.
They warned that stablecoin issuers could bypass restrictions on paying interest by partnering with exchanges or affiliates. Additionally, BPI cautioned that unchecked yield bearing stablecoins could trigger USD$6.6 trillion in bank deposit outflows, threatening credit access for businesses.
Read more: Circle’s Arc aims to expand stablecoin adoption across multiple blockchains
Read more: Coinbase relaunches liquidity fund as USDC revenue climbs 12%
Criminals might bypass checks by purchasing verified accounts
In April 2023, Treasury released its first DeFi Illicit Finance Risk Assessment. The report displayed vulnerabilities in decentralized finance that criminals could exploit. Additionally, the assessment showed that DeFi platforms could inadvertently facilitate money laundering or sanctions evasion without safeguards in place.
Industry experts warn that while embedding identity verification could enhance compliance, risks remain. Critics note that criminals might bypass checks by buying verified accounts. In addition, liability frameworks must evolve alongside technical solutions to ensure that compliance responsibilities are clear and effective.
Quantifying the exact volume of organized crime, money laundering, and illegal activity through decentralized finance platforms annually is difficult because blockchain transactions are pseudonymous and DeFi is decentralized.
However, research provides some insight into the trends and scope of illicit activity.
A study analyzing crypto related crime between 2017 and 2022 found that roughly one third of total financial losses, amounting to at least USD$30 billion, were linked to DeFi incidents. About 52 per cent of these events targeted DeFi actors, mainly due to technical vulnerabilities in protocols. Further, these accounted for 83 per cent of the financial damages. Conversely, 41 per cent of the events involved DeFi actors as perpetrators, mostly through use of contracts or market manipulation. These caused only 17 per cent of the financial damages.
Meanwhile, money laundering methods are changing, with an increasing share of illicit funds being routed through DeFi protocols. Centralized exchanges remain the main destination for illicit funds, but the growth and sophistication of DeFi platforms have made them more attractive for laundering activity.
.
