US Treasury Considers Digital ID Crackdown in DeFi – Privacy vs Regulation Showdown
The US Treasury drops a regulatory bombshell—DeFi's anonymity could be on the chopping block.
KYC Comes for Crypto
Decentralized finance platforms may soon face mandatory identity verification, turning 'trustless' systems into government-tracked ledgers. Insiders whisper the rules could drop before Q4 2025.
Privacy Tokens Sweating
Monero and Zcash investors are suddenly checking extradition treaties. The move threatens DeFi's core promise—financial freedom without gatekeepers.
Wall Street Smirks
Traditional finance players—who spent millions lobbying for this—are already pricing in the compliance advantage. Nothing levels the playing field like dragging your competition into bureaucracy.
Final thought: When regulators say 'transparency,' grab your VPN and check your offshore accounts—just in case.
US Treasury to fight illicit financial activities with digital IDs
One of the ideas that the Treasury is requesting public comment on is the potential for DeFi protocols to embed digital identity credentials directly into their code. Under this model, a smart contract WOULD be able to verify the credentials of a user before they execute any transactions. This way, they would have effectively built Know Your Customer (KYC) and Anti-Money Laundering (AML) safeguards into blockchain infrastructure.
In its statement, the US Treasury mentioned that the digital identity solutions, which will likely include government IDs, biometrics, or portable credentials, could reduce compliance costs while making sure that users still have the same level or even more privacy when carrying out their transactions.
In addition, it could also make it easier for financial institutions and DeFi services to detect money laundering, terrorism financing, or sanctions evasion even before transactions happen.
The Treasury also discussed the potential challenges, including concerns about data privacy and the need to balance innovation with regulatory oversight. “Treasury welcomes input on any matter that commenters believe is relevant to Treasury’s efforts,” the agency wrote.
Meanwhile, the agency has opened comments until October 17 and will submit a report to Congress. It is expected that the body will also issue guidance or propose new rules based on the findings.
United States banks warn against loopholes in stablecoin yield
Several banking groups, led by the Bank Policy Institute (BPI), urged Congress to tighten rules under the GENIUS Act, warning that a loophole could let stablecoin issuers bypass restrictions on paying interest. The BPI warned that a failure to close the loophole would result in the disruption of credit FLOW to American businesses and families, triggering about $6.6 trillion in deposit outflows from traditional banks.
The group mentioned that the GENIUS Act prohibits stablecoin issuers from offering interest or yield to token holders. However, the ban does not extend to crypto exchanges or affiliate businesses, potentially allowing issuers to sidestep the law by offering yield through those partners. Offering yields is one of the features that stablecoin issuers have used to attract users, with some offering yield natively while others reward users for holding stablecoins on exchanges.
The BPI added that such a shift could pose a serious risk to the American credit system. The result will be greater deposit flight risk, especially in times of stress, which will undermine credit creation throughout the economy. The corresponding reduction in credit supply means higher interest rates, fewer loans, and increased costs for Main Street businesses and households.
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