Government authorities plan to investigate the implementation of digital identification in Decentralized Finance (DeFi) to reduce illegal activities and fraud within the cryptocurrency sector.
The United States Department of the Treasury has taken a significant step towards addressing illicit activities in the burgeoning Decentralized Finance (DeFi) ecosystem. In a notice published on August 17, the Treasury has invited public input on the potential integration of digital identity verification directly into DeFi smart contracts.
The initiative, which aligns with the Administration's policy promoting the responsible development and adoption of digital assets, is part of a broader mandate under the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act). The GENIUS Act instructs the Treasury to investigate emerging compliance technologies, including artificial intelligence, digital identity verification, blockchain monitoring, and APIs.
The Treasury's notice proposes that DeFi protocols could embed digital identity credentials directly into their code, allowing smart contracts to automatically verify user identities before processing transactions. This approach would incorporate Know Your Customer (KYC) and Anti-Money Laundering (AML) safeguards directly into blockchain operations.
The Treasury is welcoming input on innovative methods to detect and mitigate illicit finance risks involving digital assets. The Secretary will gather input on strategies that regulated financial institutions use, or could use, to detect illicit activities, including money laundering, in digital asset markets.
The implications of the Treasury's actions may extend beyond DeFi protocols. Observers suggest that the initiative may influence how other countries approach DeFi regulation. Furthermore, the way the Treasury incorporates public feedback could set a precedent for the wider adoption of compliance technology in digital finance.
The Treasury is also considering regulatory and enforcement measures to reduce DeFi crime. These measures include enhancing transparency, monitoring suspicious transactions, and developing new compliance frameworks to address illicit activities in the DeFi ecosystem. The notice opens a 60-day public comment period, during which interested parties can submit their views and suggestions.
After reviewing public comments, the Treasury will research the suggested methods, summarize findings in a report, propose legislative and regulatory measures, and issue guidance or rulemaking based on the results. The initiative could shape the next wave of secure, transparent blockchain innovation.
The Treasury's stance on Bitcoin reserve purchases may evolve, as indicated by Scott Bessent's reversal, as reported in "Scott Bessent Reverses: US Treasury Still Eyeing Bitcoin Reserve Purchases". However, the focus at present is on combating illicit activities in the crypto markets, a move that targets North Korea's crypto money laundering operation, as detailed in "US Treasury Targets North Korea Crypto Money Laundering Operation".
The implications of these actions for SHIB holders, as seen in the article "US Treasury Cracks Down on Garantex: Implications for SHIB Holders", remain to be seen. As the public comment period commences, it is an opportune time for stakeholders to voice their opinions and contribute to shaping the future of DeFi regulation.
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