CODE Act Demands AML/Sanctions Compliance Be Built Into DeFi Smart Contracts; Treasury Gets 30 Months to Define and Regulate Sector

The new CODE Act of 2025 is Congress’s latest move to bring the wild west of decentralized finance (DeFi) under the same basic rules that govern banks and money transfer services. The bottom line? If you use, develop, or invest in DeFi, the era of anonymous, unregulated transactions is closing. This bill mandates that anti-money laundering (AML) and sanctions compliance must be baked right into the software—the smart contracts—that run these services.

The Government’s 18-Month Homework Assignment

This legislation kicks off with a tight deadline for the Treasury Department. Within six months, the Treasury Secretary must launch an 18-month, temporary public-private partnership. The goal isn't just to talk about compliance; it’s to figure out the technical specs for building AML, identity verification, and sanctions checks directly into smart contracts before they even go live on a public blockchain (Sec. 3). Think of it as requiring a safety inspection and emissions test before a car leaves the factory floor, but for code.

This partnership involves heavy hitters like FinCEN, the FBI, and CISA, alongside private sector risk experts (Sec. 3). For developers and users, this is a big deal because the outcome will likely shape how future DeFi platforms are built. If the partnership succeeds, it could mean standardized, auditable compliance protocols. If it fails, or if the resulting standards are too cumbersome, it could stifle innovation or force developers to build compliance gateways that feel a lot less “decentralized.”

One interesting carve-out: any DeFi service owned or controlled by a “covered person”—a high-level government official or their immediate family—is explicitly banned from participating in this partnership (Sec. 3). While perhaps intended to prevent conflicts of interest, it’s an unusual exclusion for a program designed to set industry-wide technical standards.

The Final Countdown: Defining and Mandating Compliance

While the partnership is running, two major regulatory actions are mandated. First, FinCEN has 18 months to issue an official advisory notice explaining exactly how existing Bank Secrecy Act (BSA) rules apply to DeFi services (Sec. 4). This is the much-needed clarity the industry has been asking for, but it will certainly mean new compliance costs for operators.

Second, and most critically, the Secretary of the Treasury has 30 months to issue a new rule (Sec. 5). This rule must first provide clear definitions for “decentralized finance service” and “decentralized smart contract.” The definition of a DeFi service is already broad, covering everything from peer-to-peer trading and lending protocols to cross-chain bridges, and it explicitly allows the Treasury Secretary to add more services to the list later (Sec. 6). This open-ended authority could create significant regulatory uncertainty for the sector down the line.

Once defined, the rule will mandate that all DeFi services establish and maintain two risk-based programs: one for anti-money laundering (AML) under the BSA, and another for sanctions compliance (Sec. 5). This means that platforms currently operating with minimal identity checks will have to implement Know Your Customer (KYC) procedures or other substantial controls. For the average user, this likely translates to more friction, potentially requiring identity verification to access services that were previously permissionless. It’s the trade-off for bringing this sector out of the regulatory shadows and reducing its use for illicit finance.