U.S. Treasury Eyes Digital Identity for Crypto Compliance

Treasury seeks public input on using digital identity tools to enhance crypto compliance and fight illicit finance under the GENIUS Act.

The U.S. Department of the Treasury is seeking public input on using digital identity tools to combat illicit finance in crypto markets. This initiative was launched this week following the passage of the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) in July 2025. The Act is to control payment stablecoin issuers and increase security. It is a great leap towards the modernization of financial oversight.

U.S. Explores Digital Identity Tools to Curb Crypto Laundering

Moving to the specifics, the Treasury consultation is aimed at incorporating identity checks in smart contracts of decentralized finance (DeFi). This would assist in monitoring transactions and money laundering. The GENIUS Act instructs the Treasury to investigate such technologies as APIs, artificial intelligence, and blockchain monitoring. Such instruments would enhance adherence within the crypto sector. The citizens are given time up to October 16, 2025, to provide feedback.

In addition, the consultation deals with critical issues. It questions how the financial institutions can enhance their capability to identify illicit activities with digital assets. It also looks into the cost to regulated entities and the sensitivity of the data collected. Issues of privacy and security are being examined. The Treasury aims at striking a balance between innovation and security. This is an indication of increasing worries about the use of crypto in illicit purposes.

In the future, the crypto regulation may change through digital identity verification. As an example, users may be required to connect the wallets to verified identities. This may scare off criminals and increase privacy arguments. The Treasury strategy continues previous work, such as the 2023 Executive Order on Digital Assets. That directive demanded superior anti-money laundering best practices. At this point, it is about putting into practice.

Additionally, the crypto market has grown rapidly. By August 2025, its value will exceed $3 trillion globally. Over 200 billion is in stablecoins that are pegged to the U.S. dollar. Still, illicit finance is an issue, and the estimates of laundered money through crypto are estimated to reach 20 billion a year. The plan of the Treasury may lower these amounts. It could also promote further institutional use.

Related Reading: Fed Ends Crypto Supervision Program, Returns to Standard Oversight | Live Bitcoin News

GENIUS Act Spurs Global Shift Toward Crypto Compliance

Going to the greater influence, this step can establish an international trend. Other nations such as the EU and the UK, are also considering digital ID for crypto. The U.S. lead can affect the foreign laws. In the meantime, DeFi platforms, with assets under management of $150 billion, are under pressure to comply. There is a worry that this will kill innovation. To others, it is a condition of legitimacy.

Moreover, the Treasury is working together with such agencies as IRS and SEC. This will guarantee coordination. Analysts believe there can be a pilot program by the middle of 2026. The success is determined by the input of the public and the preparedness in technology.

Finally, the fact that the U.S. Treasury is insistent on digital identity as a part of crypto compliance is a critical milestone. It deals with illegal funding and defines the future of the industry. The initiative might improve trust and security with the GENIUS Act as its basis. The verdict will have an impact on the crypto policy around the world in years to come.