IMO, governments should provide a service for linking identity to cryptocurrency account addresses. Let me present my passport and link my account using a web service or at the post office.
This way, DeFi protocols don't have to worry about anything to be compliant and if the government provides an attribute on-chain, it can be used to build democratic DAOs with "One person, One vote" instead of the plutocratic operation of today's DAOs.
DeFi protocols (that want to) should still conform to a spec that gives the three letter agencies insight into what kind of action was performed, e.g. it's pretty unclear what exactly AAVE's debt tracking is unless you read the docs, multiply that by every single DeFi app & protocol and it's really intensive.
This way, DeFi protocols don't have to worry about anything to be compliant and if the government provides an attribute on-chain, it can be used to build democratic DAOs with "One person, One vote" instead of the plutocratic operation of today's DAOs.
Gist with details about implementation: https://gist.github.com/numtel/c2030ec401959a45825ee3efc6f3b...