The U.S. Department of the Treasury is actively seeking public feedback on integrating digital identity tools into DeFi smart contracts and broader crypto compliance efforts, following the passage of the GENIUS Act in July 2025.

This initiative aims to incorporate technologies such as AI, blockchain monitoring, APIs, and digital identity verification to combat illicit finance and improve transparency in digital asset markets.

The Treasury is exploring options like embedding identity checks directly into blockchain transactions and requiring users to connect verified wallets, which could deter criminal activity but also raise privacy concerns.

Key issues under consideration include how financial institutions can better identify illicit activities, balancing the costs, privacy, and data security involved in adopting these new technologies.

Despite rapid growth in the crypto market, valued at over $3 trillion with stablecoins exceeding $200 billion, illicit finance remains significant, estimated at around $20 billion annually.

The Treasury’s efforts could help reduce money laundering, promote institutional adoption, and may lead to a pilot program by mid-2026 to test these compliance tools.

Future regulations might require crypto users to connect wallets to verified identities, which could help prevent illegal activities but also spark ongoing privacy debates.

This push is part of the broader implementation of the GENIUS Act, which aims to regulate stablecoins and enhance anti-money laundering measures through new compliance technologies.

These U.S. initiatives could influence global crypto regulations, as other regions like the EU and UK consider similar digital ID solutions, impacting DeFi platforms managing assets around $150 billion.

AI and blockchain monitoring are increasingly used to analyze large transaction datasets and track pseudonymous transactions, helping identify illicit financial activities and high-risk entities.

Following the public comment period, the Treasury plans to conduct research and potentially propose new regulations to Congress, reinforcing oversight of stablecoins under the Bank Secrecy Act.

The Treasury is collaborating with agencies such as the IRS and SEC to ensure coordinated regulation, signaling a significant move toward integrating digital identity into crypto compliance.

The department emphasizes that advanced compliance tools are crucial to protecting the digital asset ecosystem from threats like money laundering, sanctions evasion, and cybercriminal activities from nations such as Iran and North Korea.