#236—A practical approach to digital identity

It's about inclusion and sovereignty

Dec 12, 2022

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A practical approach to digital identity
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1. A practical approach to digital identity

The concept of verifiable credentials has been around for a while now and plenty of companies are developing technology around it—including GlobaliD and Indicio. And earlier this year, the w3c standardized decentralized identifiers, a major milestone.

The appeal is natural: portable credentials that you can hold in your own digital wallet while owning and controlling your data.

The challenge, of course, is making this practical and useful for everyday people. (Back in September, Lone Star Credit Union shared a working demo of new customers signing up for accounts using verifiable credentials.)

Last week, Greg published an op-ed in Forbes detailing a multi-layered approach to digital identity:

I believe the solution is a multilayered identity system. Imagine an Olympic games winners’ podium—you have bronze, silver and gold. Each represents qualification for a financial account with corresponding levels of access and risk limits.
The bronze podium could be achieved by simply verifying your phone number and declaring some basic personal information. To reach the silver podium, you would need to add a government-issued ID to your account. The final step is the gold podium, which would require you to prove ownership of an account at a regulated institution such as a bank.
To manage risk, people on the bronze podium may have lower transactional capabilities and risk limits, but they would be able to participate and move up to the next level as they establish trust with institutions. All of this can be done online, with digital credentials that can be held by the end user themselves, rather than expose personal information repeatedly at each institution, making them vulnerable to data breaches.

The primary benefits here are access, inclusion, and sovereignty. But when our data isn’t stuck disparate silos, there’s also the added benefit of compliance:

Self-sovereign digital identity solves several problems for financial institutions by shifting the ownership of these digital credentials to the end user. Right now, each bank conducts its own proofing of identities without interacting with other institutions. If a criminal wants to launder money, for example, all they have to do is use a synthetic physical identity to open up a bank account. If one bank refuses, there are many more to try.
That’s how 99% of all money laundering goes through the banking system—because identities aren’t interoperable across institutions. That means one bank’s proprietary system isn’t able to communicate with another’s. Adopting a system of standardized and interoperable digital credentials across all institutions would enable a more robust approach to anti-money laundering and fraud.

Yaka Stuff

#236—A practical approach to digital identity

It's about inclusion and sovereignty

1. A practical approach to digital identity

2. This week in FTX

3. This week in crypto, stablecoins, and web3

4. Stuff happens

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