The US Treasury is considering a controversial plan to embed identity checks directly into decentralized finance (DeFi) smart contracts, a move that critics argue could dismantle the foundation of permissionless finance.

The proposal comes under the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act), signed into law in July, which directs the Treasury to explore new tools to fight illicit activity in crypto markets. One option being discussed is requiring DeFi protocols to automatically verify a user’s government ID, biometric data, or wallet certificate before processing transactions.

Supporters say integrating Know Your Customer (KYC) and Anti-Money Laundering (AML) checks into blockchain systems would streamline compliance and prevent criminals from abusing DeFi. Fraser Mitchell, Chief Product Officer at SmartSearch, argued that real-time identity verification could “unmask anonymous transactions” and make it harder for bad actors to launder funds.

However, critics warn the plan would amount to mass surveillance. Mamadou Kwidjim Toure, CEO of Ubuntu Tribe, compared the proposal to “putting cameras in every living room.” He argued that tying government IDs or biometrics to blockchain wallets could permanently trace every transaction to real-world identities, eroding pseudonymity and opening the door to censorship or automated tax collection.

Beyond privacy, there are fears of exclusion. Billions of people worldwide still lack formal identification. Requiring government-issued credentials could block access for migrants, refugees, and the unbanked, undermining DeFi’s goal of financial inclusion.

Data security also looms large. Linking sensitive identity data to financial activity could make hacks catastrophic, exposing both funds and personal details. Critics stress that alternatives exist, such as zero-knowledge proofs and decentralized identity standards, which can verify eligibility without revealing personal information.