The U.S. Treasury, under Secretary Janet Yellen, has unveiled a proposal that could fundamentally change how decentralized finance operates. As part of the GENIUS Act, the Treasury is exploring ways to integrate digital identity verification directly into DeFi smart contracts, aiming to strengthen Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance across the crypto ecosystem.
If implemented, this system would require users to verify their identities before completing a transaction. Verification could involve government-issued IDs, biometric information, or portable digital credentials, all checked automatically through blockchain-enabled APIs and artificial intelligence tools. The goal is to create an environment where compliance is embedded in the code itself, reducing reliance on manual oversight and making illicit transactions far harder to execute.
The Treasury has launched a public consultation, open until October 17, 2025, to gather feedback from developers, regulators, and industry participants. Officials want to know how such systems can be scaled globally while still protecting user privacy and upholding the decentralized principles that define DeFi.
Supporters see the proposal as a breakthrough, potentially simplifying compliance and boosting trust in the digital asset sector. By building safeguards directly into smart contracts, DeFi platforms like Aave, Uniswap, and others could demonstrate stronger accountability without the need for traditional intermediaries. Critics, however, worry that these measures might undermine the very anonymity and openness that drew users to DeFi in the first place.
The initiative is already sparking global discussions. Observers suggest that if successful, it could become a blueprint for other countries to regulate digital assets without stifling innovation. For policymakers, the move reflects an effort to strike a balance between fostering financial innovation and ensuring systems are not exploited for money laundering, fraud, or terrorism financing.
Once the consultation period closes, the Treasury will review the responses and report to Congress. That feedback could shape future regulations and determine how identity, privacy, and financial integrity coexist in the next phase of decentralized finance.
