US Treasury Proposes AML Rules for DeFi and Asset Freeze Powers

The United States Department of the Treasury has submitted a pivotal report to Congress under the GENIUS Act, outlining new regulatory recommendations for the decentralized finance (DeFi) sector. According to Alex Thorn, Head of Research at Galaxy, the proposal seeks to bring DeFi applications under existing Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) frameworks. This move represents a significant step in the federal government's efforts to mitigate financial risks associated with decentralized protocols and unhosted wallets.

Enhanced Enforcement and Digital Asset Hold Law

A central component of the Treasury's recommendation is the introduction of a digital asset “hold law” safe harbor. This provision would grant financial institutions and service providers the authority to temporarily freeze suspicious funds during active investigations. Under the proposed guidelines, these entities would be permitted to halt transactions without an immediate court order, provided there is a reasonable suspicion of illicit activity.

The safe harbor is intended to protect institutions from legal liability while they cooperate with law enforcement to prevent the movement of potentially laundered capital.

Rising Fraud Figures and Regulatory Justification

The report emphasizes the urgent need for updated oversight by highlighting the scale of criminal activity within the ecosystem. The FBI has documented a sharp increase in digital asset-related crime, with recorded losses from crypto fraud reaching approximately $5.6 billion in 2024. The Treasury argues that the current lack of transparency in some corners of the blockchain industry facilitates these illicit flows.

The recommendations focus on several key areas of concern:

• The expansion of AML/CFT obligations to include developers and governing bodies of decentralized protocols.
• The implementation of standardized reporting requirements for large-scale cryptocurrency transfers.
• The development of technical tools to bridge the gap between on-chain anonymity and regulatory compliance.

Conclusion

As the legislative process continues, the proposal under the GENIUS Act signals a shift toward more stringent oversight of the DeFi space. By advocating for the power to freeze assets and mandating compliance for decentralized platforms, the U.S. Treasury aims to integrate digital assets more deeply into the traditional financial regulatory perimeter. Stakeholders in the Ethereum, Solana, and broader DeFi ecosystems will be closely monitoring how these recommendations translate into formal law.