- The U.S. Department of the Treasury is asking for public input on using digital identity and new technology to curb illegal activity in crypto markets.
- The request follows the passing of the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) in July.
- The Treasury is considering using digital identity checks within decentralized finance (DeFi) smart contracts as part of future regulations.
- Digital identity solutions aim to lower compliance costs and increase privacy, but the Treasury notes concerns over data privacy and regulatory balance.
- Major U.S. banks have warned that a loophole in the GENIUS Act could allow stablecoin issuers to bypass interest restrictions, potentially moving trillions of dollars away from traditional banks.
The U.S. Department of the Treasury is collecting public comments on ways to use digital identity tools and new technologies to prevent illegal financial activities in the cryptocurrency sector. The consultation follows the recent enactment of the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act), signed in July, which lays out new rules for stablecoin issuers.
The Treasury’s request looks at using methods such as Artificial Intelligence, APIs (application programming interfaces), digital identity verification, and blockchain monitoring to fight money laundering and other financial crimes in digital asset markets. Among the options is putting identity checks directly into DeFi smart contracts. This means transactions would only proceed if a user’s digital identity—like a government ID or verified credential—meets compliance standards.
According to the Treasury, these digital identity tools could help cut compliance expenses while improving privacy for crypto users. The agency stated that such solutions could help financial institutions and DeFi platforms catch suspicious activity—such as money laundering or terrorism financing—before transactions take place. The Treasury noted, “Treasury welcomes input on any matter that commenters believe is relevant to Treasury’s efforts.”
Public comments on the proposed measures are open until October 17, 2025. After the consultation, the Treasury will provide a report to Congress and may suggest new guidelines or regulations based on public feedback.
In related news, top U.S. banking groups, including the Bank Policy Institute (BPI), have urged Congress to address what they see as a loophole in the GENIUS Act. In a letter, BPI stated that stablecoin issuers might work with exchanges or affiliated companies to offer interest on stablecoins, possibly defying the law’s intent. The group warned that this could lead to as much as $6.6 trillion in deposit outflows from traditional banks, threatening credit for businesses.
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