The US is Seriously Monitoring DeFi: Digital Identity a Solution to Prevent Crime?

Jakarta, Pintu News – The US Treasury Department is considering the use of identity proofing as a built-in feature on decentralized finance (DeFi) platforms, a move that could change regulations in one of the freest corners of the crypto world.

Check out the full information in this article!

Introduction to Identity Regulation in DeFi

As part of the consultation process under the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, passed in July, the US Treasury Department was tasked with exploring new compliance technologies.

These technologies include APIs, artificial intelligence, and blockchain monitoring tools that can help detect and prevent illegal activities in the digital marketplace.

One of the proposed ideas is to embed digital identity credentials directly into DeFi smart contracts.

In practice, this means transactions on the DeFi protocol will only be processed once the user’s identity is verified, bringing Know Your Customer (KYC) and Anti-Money Laundering (AML) checks into the underlying code.

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Benefits and Barriers of Digital Identity Integration

The Treasury Department argues that such systems, whether based on government IDs, biometrics, or portable digital credentials, can reduce costs for companies while increasing privacy protections for users.

Proponents of the idea say that it could also provide a way for regulators and financial institutions to identify red flags, money laundering, sanctions evasion or terrorism financing before the transfer is completed. However, the idea comes with hurdles.

The addition of identity checks goes against DeFi’s open and permissionless design. Developers warn that it could weaken user privacy or drive activity to platforms outside of US jurisdiction.

The Treasury has acknowledged the compromise, stating that any approach must strike a balance between regulation and innovation.

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Implications for the Future of DeFi

Public comments are open until October 17, 2025. After the review period ends, the Treasury Department will draft a report for Congress, which could lead to new guidelines or formal rules.

For DeFi, this is a watershed moment. A sector built on open and permissionless code is now facing the possibility of identity checks written directly into its infrastructure, a sign that regulation is getting closer to the core of the system.

Conclusion

This move marks a turning point in the way the US government regulates the crypto ecosystem, particularly DeFi. By integrating identity checks into smart contracts, the Treasury Department is attempting to create a balance between security and innovation, albeit with no small amount of challenges.

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Reference

• Crypto Times. US Treasury Weighs Digital IDs in DeFi to Curb Crime. Accessed on August 19, 2025
• Featured Image: Generated by AI