Blessing or Backlash? U.S. Treasury Proposes Identity Verification for DeFi

TradingKey – On July 17, the U.S. Department of the Treasury announced it is exploring the integration of digital identity verification tools into decentralized finance (DeFi) protocols. 

The initiative aims to combat illicit financial activity — such as money laundering and sanctions evasion — by embedding KYC (Know Your Customer) and AML (Anti-Money Laundering) safeguards directly into DeFi smart contracts.

Regulatory Shift Toward Innovation

This proposal marks a significant departure from the previous administration’s stance. In June, the SEC officially repealed Gary Gensler-era DeFi restrictions, and in early August, it clarified that liquidity staking would not be classified as a security. These moves reflect the Trump administration’s pro-crypto agenda, with SEC Chairman Paul Atkins stating:“We’re mobilizing every department to make the U.S. the global hub for Bitcoin and digital assets.”

The Treasury’s ProjectCrypto initiative, launched under the GENIUS Act, further supports this shift by encouraging the use of APIs, biometrics, and AI to modernize compliance frameworks.

Identity Verification in DeFi — Pros and Pitfalls

While the Treasury’s goal is to protect investors and clean up the financial ecosystem, the proposal has sparked debate across the crypto community. Key concerns include:

• Loss of anonymity, a core principle of DeFi
• Data privacy risks, especially if biometric or government-issued IDs are involved
• Technical and philosophical tension with DeFi’s permissionless architecture

Supporters argue that identity tools could reduce compliance costs, strengthen privacy protections, and help detect illicit activity before transactions occur. Critics warn it could drive users to offshore platforms and undermine the open nature of DeFi.