US Treasury Seeks Public Input on Digital IDs in DeFi to Detect Illicit Activity

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The US Department of the Treasury has requested public comment on using “innovative or novel methods, techniques, or strategies to detect and mitigate illicit finance risks involving digital assets.” 

This includes the use of AI in AML/CFT and sanctions compliance, as well as blockchain monitoring and the use of digital identity verification in decentralized finance (DeFi) smart contracts. This follows the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, passed on July 18, 2025, showing the US is steadily clarifying digital asset regulations.

A proposed model of DeFi digital ID verification would allow smart contracts to automatically verify a user’s identity before completing transactions. 

The Treasury would do so by using tools designed to develop “portable digital identity credentials designed to support various elements of AML/CFT and sanctions compliance.” This could involve incorporating credentials like government-issued IDs or biometric information. 

Treasury officials say digital identity solutions could strengthen user privacy and reduce compliance costs for financial institutions, while helping detect illicit DeFi activities such as money laundering, terrorist financing, or sanctions evasion.

At the same time, the Treasury acknowledges several significant concerns, including costs to financial institutions, operational challenges, cybersecurity risks, actual effectiveness, and the potential privacy implications of collecting and embedding private identity information.

Public consultation closes on October 17, 2025.