Treasury suggests KYC’ing DeFi

Reported by Steven Stradbrooke

(Excerpt shared below. To read full report, go to: https://coingeek.com/gemini-pre-ipo-stats-underwhelm-treasury-to-kyc-defi/)

Not everyone in the federal bureaucracy has been told to ‘stand down’ on crypto issues. On August 18, the Treasury Department issued a request for comment on ‘Innovative Methods to Detect Illicit Activity Involving Digital Assets.’ Interested parties have until October 17 to make their opinions known.

The request was issued in keeping with a stipulation in the GENIUS Act, the stablecoin legislation that Trump signed into law last month, that requires the Treasury to examine ways of policing stablecoin-based illicit activity.

This requirement had four areas of focus: application programming interfaces (APIs), artificial intelligence (AI), digital identity verification, and use of blockchain technology and monitoring. Among the factors Treasury was asked to consider are how much sensitive data needs to be collected/reviewed, as well as the privacy risks of collecting and storing this data.

In terms of digital identity verification (aka identity proofing), Treasury acknowledges ongoing efforts “to develop portable digital identity credentials designed to support various elements of [anti-money laundering/countering the financing of terrorism] and sanctions compliance, maximize user privacy, and reduce compliance burden on financial institutions.”

These identity tools “can also potentially be used by regulated digital asset intermediaries to support onboarding, or by decentralized finance(DeFi) services’ smart contracts to automatically check for a credential before executing a user’s transaction.”

This last bit left some in the DeFi community concerned that their ability to transact anonymously via DeFi protocols is under threat. Blockchain sleuth ZachXBT warned that bad actors will “completely bypass” any new identity checks via their traditional methods: purchasing accounts that have already passed ‘know your customer’ (KYC) checks. Meanwhile, “innocent people would inevitably get their [personal data] leaked by incompetent teams.”

Any new KYC restrictions could also apply to World Liberty Financial (WLF), the DeFi platform supported and partially controlled by the Trump family, which may or may not have something to say regarding the implementation of any new identity rules.