The American treasury investigates whether identity controls should be directly built up in decentralized financial contracts (Defi), a movement that warns critics, could rewrite the foundations of permissionless financing.
Last week the agency opened a consultation under the Guiding and Counterting National Innovation for Us Stablecoins Act (Genius Act), which was signed in the law in July. The law instructs the treasury to evaluate new compliance tools to combat illegal financing in cryptom markets.
One idea was to include identity references directly in smart contracts. In practice, this would mean that a Defi protocol can automatically verify the government -ID of a user, biometric references or digital wallet certificate before a transaction continues.
Proponents claim that building your customer (KYC) and anti-money laundering practices (AML) in blockchain infrastructure can streamline compliance and streamline criminals from Defi.
Treasury is considering digital ID verification in Defi. Source: Laz
Fraser Mitchell, Chief Product Officer at AML Provider SmartSearch, said Cointelegraph that such tools “can unmask the anonymous transactions that make these networks so attractive to criminals.”
“Real-time monitoring for suspicious activity can make it easier for platforms to reduce risks, detect and ultimately prevent money laundering from using their networks to wash the yield of some of the world’s worst crimes,” said Mitchell.
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Defi -ID -Controls: Data or Risk -Supervision Protect?
Mitchell recognized the consideration of privacy, but argued that there were solutions. “Only the required data required for monitoring or regulatory audits must be stored, with everything else deleted. All data that is stored must be coded at Rhine, which reduces the risk of a large infringement.”
However, critics say that the proposal is the core of Defi. Mamadou Kwidjim Toure, CEO of Ubuntu -Stame, compared the plan to “place cameras in every living room”.
“On paper it looks like a neat shortcut. But you change a neutral, permissionless infrastructure into a permission where access is entitled by the government identity references approved. That changes fundamentally what Defi is intended,” Tourre told Cointelegraph.
He warned that if biometric or government IDs are bound by blockchain portfolios, “each transaction runs the risk of becoming permanent traceable into a real-world person. You lose pseudonymity and, in expansion, the ability to transact without supervision.”
For Toure, the deployment goes beyond compliance. “Financial freedom is based on the right to a private economic life. Input -ID erode at the protocol level that and creates dangerous precedents. Governments can automate transactions, black list wallets or even taxing directly through smart contracts.”
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Who is lagging behind?
Another concern is exclusion. Billions of people worldwide still miss formal identification. If Defi-Protocols issued by the government references, entire communities, migrants, refugees and the non-stuck risk require that it is locked.
“It can limit access for users that prefer anonymity or cannot meet the ID, which limits Defi’s democratic character,” Toure said.
Data security is also a flash point. Linking biometric databases to financial activity can make Hacks catastrophic, so that both money and personal identity are uncovered in a single infringement.
Critics emphasize that the choice is not binary between crime paradises and mass surveillance. Privacy retention tools such as Zero-knowledge proofs (ZKPS) and Decentralized Identity (DID) standards offer ways to verify the suitability without exposing full identity.
With ZKPS, users can prove that they are not on a sanction list or older than 18 without revealing who they are. Has enabled frameworks users to keep verifiable references and to make it known selectively. “Instead of static government -IDs, users have verifiable references that they make selective,” Toure said.
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