The internet of value: The combination of blockchain, self-sovereign identity, and tokenized fiat money

The digitalization of the means of production, the offer, the demand, the communication, the payments, the education, the health, and the social interaction, among many others, is requiring new ways of electronic identification, transactions, and payments. The COVID-19 pandemic has also increased the urgency to have more efficient ways to do everything remotely.

This urgency has being leading to the advent of a new digital era, the era of the internet of value. In this new era, citizens will use digital wallets to manage all their digital assets in a secure and easy way, authenticate to digital services, interact with others, buy and sell products, or effectuate payments. There are different types of digital wallets, but the most portable ones are mobile applications such as DIDI, KayTrust, REM, or uPort (some of them are still under development, so not all of them are available in app stores yet).

Digital assets are both digital tokens and digital credentials. Some examples are a digital passport, digital diplomas, digital titles of property, flight tickets, concert tickets, lease contracts, digital dollars, digital euro, cryptocurrencies, virtual coins, and any other asset we can think of, no matter if they are digital already or not.

By managing digital identity credentials in a simple and safe digital wallet, we will be able to proof to others who we are in real time, with no need of intermediaries and deciding what kind of information we want to disclose about ourselves (i.e. sex but not age), being even able to generate zero knowledge proofs (i.e. proving we are over 21 without revealing our age).

By managing digital tokens, some of them representing regulated digital currencies (e-money minted by authorized entities) we will also be alble transfer money either as an end or as a mean to buy and sell other digital assets, with no need of intermediary financial entities to validate and execute the transactions. Indeed, electronic transactions that will now be peer-to-peer between users’ digital wallets.

In order for all of this to be possible and the internet of value to be a reality, we need three complementary layers:

Blockchain: The first layer is trusted, decentralized, and immutable blockchain ledgers of information with smart contracts that allow the automation of process and the digitalization of any physical asset represented by a digital token.

Self-sovereign identity: The second layer is self-sovereign identity, a new way of generating, managing, and sharing identity credentials that allow natural and legal persons to proof who they are to others, using digital wallets.

Tokenized fiat money: The third element is tokenized fiat money, which is money issued by regulated entities in the form of blockchain tokens living in the decentralized ledger.

Blockchain networks

Blockchain networks are a specific type of decentralized ledgers characterized for having smart contracts to automate processes and represent digital assets, having consensus protocols to generate new blocks, and having all the nodes maintaining the same copy of the information.

According to the International Standards Organization (ISO), there are three types of blockchain networks (ISO/TC 307):

• Permissionless: Permissionless networks are those that everyone can join at any time, as Bitcoin or Ethereum. Most of these networks are generally crypto-based. They are open and transparent, but generally have high transaction fees, no privacy, and all the users are pseudonymous. Additionally, as participants are not identified, transactions and applications can hardly be forced to be compliant with regulation.
• Permissioned private: Permissioned private networks are those where a consortium of a finite and well-defined amount of entities deploy, run, and maintain the nodes. Generally, these networks are developed and even maintained by a blockchain service provider. Private networks, in general, do not have transaction fees (although there might be a fixed cost charged by the service provider, if there was one), and therefore allow privacy. However, these networks are not decentralized nor transparent, the scalability is very limited, and are usually designed for a single use case or application. Examples of these networks are the hundreds of private blockchain networks behind specific blockchain applications, the IBM FoodTrust, or the blockchain network of the Energy Web Chain by the Energy Web Foundation consortium.
• Permissioned public: Permissioned public networks are those where a consortium initiates a network and allows everyone to join provided that they meet certain requirements such as being authenticated and compliant with regulation. In these networks, the consortium is self-sufficient and does not need to rely on a vendor. Permissioned public networks are open, transparent, decentralized, and with no transaction fees. At the same time, every participant is identified so both privacy and compliance with regulation are enabled. Examples of these networks are Alastria in Spain, led by an association of over 500 members; EBSI in Europe led by the European Union; and LACChain in Latin America and the Caribbean, led by the Inter-American Development and its partners.

Self-sovereign identity (SSI)

In the self-sovereign model, the user is the central administrator of their identity. Self-sovereign identity goes further than the user centric identity, as it not only allows the user to manage authenticators and credentials, but specifies a broad list of conditions to guarantee the user’s sovereignty and requires the user also to be in control of their data. We think a digital solution is self-sovereign if it complies with the following 15 principles:

• Citizens generate their digital unique identifiers
• Citizens are in control of their authenticators (i.e. private keys)
• Citizens are in control of their digital credentials and certificates
• Citizens can retrieve control over the identifiers in case of lost or theft of their authenticators
• Citizens can retrieve the credentials and certificates in case of lost or theft of their authenticators
• Citizens can access the data associated with their digital identity
• Citizens can do selective disclosures of data
• Citizens personal identifiable information (PII) is minimized
• Right to be forgotten is guaranteed
• Digital wallets are portable
• Identity providers don not keep centralized databases with user’s data
• Digital wallet providers do not have access to citizens’ information stored in their digital wallets
• Digital wallet providers do not have access to information about citizens’ access to services, or interactions with others
• Back-up providers (for authenticators, credentials, and certificates) comply with the maximum levels of security
• Implementations comply with regulatory policies
• Trust frameworks are developed to allow the specification of identity providers and levels of assurance

In the SSI model, citizens manage all their digital tokens and credentials with digital wallets.

Tokenized fiat money

Today, every time we make an electronic transaction (i.e. with a debit or credit card, or with a Paypal account) we need the financial system to validate it. In the case of a payment with a credit/debit card, it implies that our credit/debit card provider, our Bank, and the beneficiary’s Bank, at least, are getting involved in the validation of the transaction. This has strong implications in terms of fees, and can also have very relevant implications in terms of time when we are doing a cross-border payment, for example.

The reason why we need this is because financial institutions today communicate the payment orders using networks such as SWIFT, and they are also responsible for keeping a centralized record of the balances available in each account. Therefore, financial institutions are needed to validate financial transactions and payments.

With robust solutions in the layers of blockchain and self-sovereign identity, this will no longer be necessary for a vast majority of the financial transactions. As we will all trust an immutable and decentralized ledger that keeps record of the transactions and balances of each account, we will not need to rely on financial institutions to maintain channels to communicate payment orders and keep balances. The blockchain network itself will serve to those purposes, and we will be able to make transactions in a peer to peer way between natural and/or legal persons.

Since 2015, a number of central banks and financial institutions have started their own proof of concept to test blockchain technology as a trusted network for the communication of the payment orders and for transactions. This includes the Bank of Canada (project Jasper), the Monetary Authority of Singapur (Project Ubin), the South African Reserve Bank (project Khoha), the Bank of England, the Bank of Japan and the European Central Bank (project Stella), the Bank of Lithuania (LBChain), the Bank of Brazil, and the Bank of Thailand (project Inthanon), among others.

Despite this seems to be the future of the digital economy, there are two important things to take into account. The first one is that having a public ledger and public balances does not mean that we can know how much money does everyone have. A lot has to be done in order to preserve users privacy, hide who is behind each account, and avoid personal identifiable information. The second key point is that financial institutions will not disappear at all, but their roles may change. Today, in a very simplified way, they are responsible for (i) doing KYC and AML, (ii) storing and protecting our fiat money, (iii) processing payments, and (iv) keeping account balances. Additionally, some financial entities such as Central Banks can also mint money. The only tasks for which financial entities will no longer be necessary are (iii) and (iv). But financial entities will be more necessary than ever for (i) and (ii), and of course for minting the digital tokens, both as a digital representation of fiat money living in a fiat account (the digital representation of a commodity), or as an un-back asset (a commodity itself).

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Enabling the internet of value is the goal that we have in LACChain, the Global Alliance for the development of the blockchain ecosystem in Latin America and the Caribbean led by the Inter-American Development Bank. Our architecture, that includes this three ledgers, has already been recognized by the International Telecommunications Union as one of the fourteen blockchain architectures of reference.

Author: Marcos Allende Lopez, Tech Lead of LACChain

Twitter: @MarcosAllendeL