Public comment: The US Treasury has issued a call to action in the form of a public consultation to elicit comments on digital identity tools to combat illicit finance in decentralized finance (DeFi) markets. The initiative comes after the July signing of the GENIUS Act into law.
Treasury Consultation on Digital Assets
The consultation, published this week, invites input on how technology can mitigate financial risks tied to digital assets. Public responses are open until October 17, 2025. The Treasury will review submissions, prepare a report for Congress, and may propose new rules.
Pursuant to the GENIUS Act, the Treasury Department has issued a “Request for Comment on Innovative Methods To Detect Illicit Activity Involving Digital Assets.”
Among the various methods, Treasury includes “Digital Identity Verification” particularly “by decentralized finance… pic.twitter.com/jIkvDco8Ql
— Laz (@LazPieper) August 16, 2025
The initiative stems from the GENIUS Act, which directs the agency to examine innovative methods for compliance. The Act established the first regulatory framework for stablecoin issuers and requires a deeper analysis of compliance technologies.
Digital Identity Verification in DeFi
One of the key ideas under consideration is embedding digital identity verification into DeFi smart contracts. This would allow protocols to automatically confirm user credentials before processing transactions.
Regulators have long been hoping that the integration of Know Your Customer (KYC) and Anti-Money Laundering (AML) checks with the blockchain infrastructure will help stop the risks before the transaction is made. This would mean compliance would be transferred to the code that enables DeFi systems.
Compliance Benefits and Privacy Concerns
According to the Treasury, digital identity solutions may reduce compliance costs while enhancing privacy. Potential tools include government-issued IDs, biometric systems, and portable credentials. These could provide streamlined safeguards for both institutions and DeFi services.
However, Treasury acknowledged that embedding identity into DeFi protocols introduces challenges. Concerns include user privacy, government surveillance, and the costs of deploying such technologies. The agency stated it will evaluate both effectiveness and privacy risks.
Technologies Under Review
There are four technologies that were identified to be studied according to the GENIUS Act. These will involve application programming interfaces (APIs) to enhance connectivity of the system, artificial intelligence, to derive activity, digital identity verification, and blockchain tracking.
Treasury thinks that these tools would enhance the detection on money laundering, terroristic funding and evasion by sanction. The consultation document also says that some DeFi platforms are already experimenting with digital identity functionality to fall within the compliance standard.
Banking Sector Reaction to Stablecoin Rules
Parallel to the consultation, major US banking groups have raised concerns about the GENIUS Act. The Bank Policy Institute warned that a loophole may allow stablecoin issuers to offer yield-bearing products through affiliates or exchanges.
The group argued that unchecked growth of such stablecoins could draw trillions of dollars away from traditional banks. It cautioned that this could limit lending capacity for businesses and reshape credit markets.
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Next Steps for Treasury and Congress
The consultation period will remain open for 61 days. Afterward, Treasury will prepare findings for the Senate Banking Committee and the House Financial Services Committee. The report may inform future regulatory actions.
The Treasury affirmed that the guidance or proposed rules will be informed by comments obtained from the public. The procedure will promote the vitality of innovation in digital finance and protection against criminal activity.
