Ribbit Capital’s new research: [digital] “banks may be best situated to become issuers of reusable [digital] identities”
Ribbit Capital has released a very good, practical, and detailed review of the digital identity market (for their LPs) — so far the best I’ve seen among the brain farts of various theorists, influencers and info-gypsies. Download and read it here.
For those who are not familiar with Meyer “Micky” Malka and his Ribbit Capital , it is essential to know about him. Micky is distinguished by his super ability to see the founder behind the numbers, betting on them, being an open and charismatic mentor. He has always been known for his rebellious nature to have his own unique (rather than populist) opinion and the guts to play his own game. I met Micky in June 2013 at his office in Palo Alto (thanks for the whiskey and the friendly chat!), after I invested in Simple Finance, the first ever digital bank. In November 2015, he complimented me on my ‘Money Of The Future’ research and introduced me to Dan Morehead from Pantera Capital . In 2016, 2017, and 2018, we were included in The Fintech Finance 40 list published by Institutional Investor , although, of course, Micky’s weight and influence exceed my modest contribution by a thousand times. In March 2021, Micky introduced me to his fund partner Nick Shalek . In the autumn of 2018, he was one of those who helped me with smart advice to (decide and) launch ArivalBank.com — Micky had previously emphasized to me the need to pay more attention to compliance, KYC, AML. This component, a compliance-first digital bank, became the highlight of my “arrival of a rival” — and it is precisely these reflections, painstaking homework, and continuous investment in technology that led me to constant brainstorming about digital identity (and the digital correspondent banking business).
Balaji Srinivasan, former CTO of Coinbase and renowned angel investor, also has launched the Balaji Fund, poised to revolutionize digital identity (and metastates). With a stellar track record of investing in successful startups like Akasa, Alchemy, and Digital Ocean, and early crypto protocols like Bitcoin and Ethereum, Srinivasan aims to democratize seed investing. His fund targets diverse fields such as crypto/web3, deep learning, and augmented reality. The Balaji Fund, supported by prominent backers including Naval Ravikant, Coinbase CEO Brian Armstrong, and VC Fred Wilson, is not just another investment vehicle. By leveraging the 506(c) structure, it embraces a more inclusive investment approach, allowing both institutional and non-accredited investors to participate. This could transform venture capital, traditionally limited to high-net-worth individuals and institutions. Srinivasan’s vision also includes the concept of “Network States” or “metastates,” decentralized, autonomous societies resonating with the crypto and tech communities. The Balaji Fund embodies this forward-thinking ethos, offering a broader audience the chance to invest in groundbreaking startups.
Ribbit Capital recently released a very intriguing research letter for its investors. In it, the fund, indispensable to the fintech (and crypto) industry as we know it today, announces its new investment focus: digital identity.
The authors of the study say that “identity is the new money”: linking the nature of the two phenomena and the current narrative that transactions are not just a record of numbers anymore, but increasingly a chain of information about the provenance of the transaction itself.
Also, Ribbit Capital believes that (digital) banks are most likely to become leaders in the field of digital identity (if they don’t get lazy and foolish).
The fact that we, Ribbit Capital, and other investors do not understand all the use cases that can be solved with the help of digital identity, what it will ultimately lead to, how to maximize its monetization, and how much can be earned, does not negate the need to start investing in this industry (as well as in AI). The race has already begun. According to the fund, it will take about 10 years to understand the full scale and all the prospects of digital identity.
Blockchain and the crypto industry are also very close to realizing the digital identity vision. However, the fund notes that success here may be hindered by too much focus on technology (as it is only one of the components and variables) and fragmentation (the inability to agree on a common standard).
In general, the fund’s research letter talks a lot about how EGO (often referred to in the text as “lack of will”) can be one of the stop-factors in the development and success of digital identity initiatives: both political leaders may ultimately fail to agree on uniform standards (as the world does not need a multitude of national digital identities), and fintech founders, digital banks, blockchain, and crypto startups might compete against each other instead of collaborating. As a counterexample of the ability to collaborate and collectively profit, the authors cite the creation of payment systems like VISA. (The authors compare the architecture of card systems to the possible future network of digital identity — issuer, acquirer, holder.)
The potential leadership in this industry from Apple, Google, Meta, X, Microsoft might seem obviously predictable, but the authors constantly present many counter-arguments, indicating that the obvious leaders do not always turn out to be so. Banks did not become leaders in fintech; OpenAI (more obvious contender for leadership in digital identity in the report, by the way) became a leader in AI, etc. The uncertainty of monetization and understanding of all potential prospects create a time gap for other players to start earlier than the tech giants.
““Who has the right to win in the battle of the data banks?” — “contenders that we wouldn’t count out: the banks themselves. Banks are already trusted by society to store critical data. They already have direct relationships with customers with deep identity profiles, including storing and handling sensitive data. And they have an impressive track record of convincing regulators they have the best (or the only!) solution to a problem”. “Data banks may be best situated to become issuers of reusable identities” — “we expect data banks to be some of the fastest growing identity businesses in the years ahead”.
“To meet compliance demands and combat the fraud that results from our swiss cheese-like digital identity systems, the average financial institution spends upwards of $115M on KYC, customer due diligence, and client onboarding — and the biggest banks spend more than $500M annually. Yet even with this spend, financial institutions continue to face data breaches with more frequency and greater severity, including 982+ financial data breaches from January 2018-June 2022 affecting 153.5M+ records in the US alone. So, it is hardly surprising that hearing the word identity makes most banks see red.” “But while promising banks that you might save them money on KYC, customer due diligence, or fraud management is a tried-and-true strategy for financial technology vendors, we see a bigger opportunity in flipping identity on its head and turning it into a source of revenue.” “We suspect that identity issuers can be compensated in ways that help align incentives — akin to how the card network system works. [creating global card payment networks has led to a card issuance industry that will generate over $185B in revenue globally in 2023; in the process, card payments have helped spur GDP growth for decades] In cards, the lions’ share of the economics go to card issuers, who bear the responsibility of acquiring customers, managing relationships, and handling fraud. As companies do work to issue identity credentials (and later re-verify them), there is an opportunity for them to be paid for this work while creating considerable value for whoever is paying them. Consider, for example, the opportunity for a trusted bank (say, JPM) to issue a credential to every customer that they KYC — and then to be paid by other financial services providers to verify that credential. In this case, JPM has the potential to turn a major cost center into a significant source of revenue, leveraging both their extensive operational and technological investment in KYC as well as their trusted brand. This business, like payments, is likely to have a meaningful margin — a KYC credential issued by JPM will be more valuable to all parties involved than one issued by an unlicensed offshore crypto exchange.” “Banks today are issuing a type of verified credentials in physical format through certification stamps (e.g. certifying an identity document or even issuing bank bills as identifying documents). Second, in the digital world, we see emerging open banking ecosystems where banks are beginning to acknowledge that their customers own their own data — but then arguing that they should be compensated for ensuring its security and providing access to third parties. In this way, financial institutions may find themselves becoming both data providers and data recipients, with both pieces critical to their bottom line and their broader efforts to stay compliant and serve customers well.”
“If upgrading identity can make the financial services industry — at $16T and growing — even a bit more efficient, it merits our time and capital. We plan to put both to work in the space. So, as always, we welcome all your questions and critiques.” “As we discussed at our annual meeting in October, we see many ways in which data (especially identity data) is becoming more like money. The two concepts have always been closely related; money is a ledger of who owns and who owes what, and identity is data about the people, companies, and entities on that ledger. But in a digital age, they are becoming more intertwined — for instance, money is taking the literal form of data (e.g. on blockchains) in the same moment that liquid markets for data are booming, most prominently as AI feedstock. As data becomes more like money, it is becoming more regulated, more important to secure and validate, and more than ever in need of standards to enable interoperability.”
And here’s what struck me most in the entire text — my summary:
Money is a social construct used for certain purposes, so we cannot understand it without data about the people or entities involved in the process. Who paid whom? Who owns what? Who owes what? The question about customers always reminds us that the starting point in finance is not transactions, but identity. We believe that technologies and business models built around improving identification will help usher in the next phase of transformation in financial services.
As our financial systems modernize to facilitate transactions, our identification systems are increasingly lagging behind. And yet, if you want to identify yourself on a website or apply for a financial product, you have to photograph your passport and search for old bank statements at home. When you look at the current state of identification, it’s hard not to wonder, how did we get here?
When something doesn’t work smoothly in finance, a good rule of thumb is that there’s invariably an identification problem underlying it. Why didn’t your payment reach your sister’s account in a bank in Mexico? It’s a compliance verification issue. Why is it so hard for you to maximize returns in the context of rising interest rates? Your new account is stuck in the queue for customer verification and your transfers trigger fraud alerts. Why does your bank, with which you’ve been for 22 years, ask for your name and address when you click “apply for a credit card” in the app? They lack a unified identification system between their departments. Once you start to see this, you can’t stop: identity is the invisible force enabling or hindering almost everything that happens (or doesn’t happen) in digital finance.
But we didn’t start working on this letter because we see identity as a problem. We started working on this letter because upgrading identity is a key element in how we come to better money — money that is smarter, more accessible, and much more personalized — around the world. Today, although a digital bank or electronic wallet may be faster, cheaper, simpler, and more impartial, the local banker still has an advantage when it comes to knowing the customer and offering personalized advice. But we are in the midst of an intellectual revolution in computers, which promises to bring this level of care to every person on Earth.
[The potential leadership in this industry from Apple, Google, Meta, X, Microsoft might seem obviously predictable, but the authors constantly present many counter-arguments]
Meta, Amazon, TikTok, Mercado Libre, and others are, in essence, identification companies. Bringing this level of identity understanding to financial services, where risk, compliance, and consumer protection are sacred, will require new technologies and business models that balance the need for convenience, security, and customer control. Much of our identification information is analog, scattered across hundreds of unrelated services, or protected in the data centers of a few internet giants. In terms of volume, the latter are the largest, and an identification revolution is unlikely to happen with their participation. More realistically — just as the world’s largest companies got access to our data by providing us with apps that we want and need — changes in identification systems will occur when something new motivates us to share information and adopt new behavioral patterns.
Instead, they may make us even more dependent on today’s internet giants. If Microsoft or Google already have our calendars and emails, why not rely on them? If a new player in AI, like OpenAI, becomes popular, won’t they capture our identification data too? This may be the case in many instances, but we suspect that this won’t be the full picture for several reasons. Existing internet services are unlikely to gain a monopoly, just as they didn’t on mobile applications earlier. The act of explicitly transferring data to agents will likely make consumers approach the issue more consciously, necessitating greater privacy and control. This will probably be reinforced by regulatory measures concerning AI as a sector.
Who has the right to win the battle for banking data? Perhaps the most common view is that the future is already decided — internet giants already operate as the world’s largest data banks and will continue to use user engagement, artificial intelligence capabilities, and world-class security techniques (and scale advantages) to move forward. Undoubtedly, they will be valuable data banks, but we do not see internet giants monopolizing the future market due to growing regulatory resistance and customer preferences. We expect that consumers and society will simultaneously trust Google, Meta, Apple, etc., to store important data (such as logins, communications), but will mainly look for other places to store additional highly sensitive data (such as financial services, healthcare).
[The uncertainty of monetization and understanding of all potential prospects create a time gap for other players to start earlier than the tech giants.]
Entrepreneurs and companies that meet this challenge can capture immense value. When you start pulling at the thread, you realize how much value (and wealth) is tied to business models built around identity.
Software companies that are currently considered the most specialized in the field of identification — those we rely on for managing risks, privacy, and compliance in identifying people solely in financial services — are valued at over 100 billion dollars. Companies that we currently trust to manage and use sensitive financial identity data — such as Experian, Equifax, FICO, and Intuit — are valued at even more than 300 billion dollars. But even these figures significantly underestimate the financial implications of identity, considering its key role in the value of many other companies, starting from payment networks (market capitalization of over 1 trillion dollars) to global internet giants (market capitalization of over 5 trillion dollars).
When we talk about identity at Ribbit, we focus on all data about a person (or company) — both basic (such as name, date of birth, biometrics) and a diverse range of information, from personal preferences to experience and financial profiles. Identity includes what we are used to confirming with analog documents (like birth certificates, passports, driver’s licenses, diplomas) as well as the growing repository of information generated and collected by digital services we use (like our interests in social networks, transaction histories). The pragmatic way we see it at Ribbit is that identity is all the data you can share with a trusted (financial) intermediary — to show who you are and provide them with the context needed to assist you.
But despite the existing market capital, what inspires us most is the new value that can be created. If improving identification can make the financial industry, which is worth 16 trillion dollars and continues to grow, even slightly more efficient, it deserves our time and capital. We plan to invest both in this area. So, as always, we welcome all your questions and critiques.
[The authors of the study say that “identity is the new money”: I suggest reading a more in-depth and futuristic book on this topic, where this vision was first revealed by David Birch , long before Ribbit Capital.]
As we discussed at our annual meeting in October, we see many ways in which data (especially identity data) is becoming similar to money. These two concepts have always been closely linked; money is a ledger of who owns and owes what, and identity is the data about the people, companies, and entities in this ledger. But in the digital age, they are becoming more interconnected — for example, money takes the literal form of data (like on blockchains) at the same moment when data markets become more active, most vividly manifested as raw material for artificial intelligence.
Identification data banks (or Custodians or Wallets) store, provide, and revoke access to identifiers and credentials. All data banks have the common function of keeping data safe and accessible, but we expect that several types of data banks will emerge based on operations and regulations. As a hypothetical example, an identification bank that is custodial might not have the right to use or combine data, while an identification wallet may both store and enhance data. Some data banks, operating as reusable identification wallets, will help customers aggregate identification information and bring it with them to multiple products or sites, much like how you can take your passport from one place to another in the analog world. Others will focus on the role of custodians of data exclusively for enterprises, providing Vaults and Privacy Infrastructure for storing data strictly in secure and carefully controlled environments.
We have at least another decade of work ahead of us before we understand how this value-added chain will work and where value will accumulate.
Enterprises absorbing risks will be larger, although those providing infrastructure will have higher multipliers. Control over one’s own data will likely be the most valuable of all.
As soon as companies close one vulnerability, another emerges. In the US alone, nearly 50 million consumers face fraud in the field of identification. Fraud and money laundering will always pose challenges — defenders must always be right, while violators only need to be right once — but the burden for consumers and companies is unbearable. Hoping that every person or company will secure valuable identification data against increasing fraudster capabilities is not a long-term solution.
[Worldcoin &Co will sooner or later face resistance from local governments — many of them have already made or are making their own digital identity projects. You could look at DID at an architectural level as your friend, not a foe (replacement), sort of like a “system integrator” (would explore how to most optimally and seamlessly integrate with DID the already “released” Indian Aadhaar, Singaporean SingPass, Russian GosUslugi, Chinese WeChat/AliPay ID, etc).]
We are on the threshold of implementing digital identification data almost worldwide. One of the biggest challenges of our identification systems is that the most common identifiers around the world are still analog. But this is beginning to change. India has issued 1.3 billion Aadhaar cards, the Philippines has issued 76 million PhiID, and Estonia has issued 1.3 million electronic ID e-Estonia. These digital identification systems demonstrate their value by accelerating the provision of government assistance (e.g., India’s direct cash transfers in 2020–21 to more than 200 million women with Aadhaar-linked Jan-Dhan accounts) and contributing to the development of new public infrastructure (e.g., UPI, which has become dominant in India with more than 10 billion monthly payments). COVID and the challenges it posed for governments have pushed these successful cases to further development worldwide, from the implementation of eID in the EU to several American states implementing mobile driver’s license management (mDL), and Japan expanding MyNumber to more than 90 million citizens, and 10 countries (with more than 400 million IDs) signing agreements with MOSIP, a state platform for identification. Despite the time and political will required for digital identification systems, we expect government support for digital identifiers to become commonplace worldwide within ten years.
Estonia, working on identification for two decades, provides a good example of what is possible: in creating e-Estonia, they 1) created a decentralized system for storing identification information (not giving hackers a single point of attack), 2) established a national security standard for data registrars and secure data exchange between them (named X-Road), 3) implemented a high level of transparency, including controls allowing residents to see how, when, and why their data is accessible to various institutions. A wide range of others use similar approaches or concepts; blockchain ecosystems, for example, have attracted advocates with many of the same principles — greater user control over data, with a high degree of decentralization and transparency.
Standards are emerging that foster innovation in the field of identification. With the development of digital identifiers, they become more open and compatible. Examples include the W3C model for verifiable credentials, ISO/IEC 18013–5 (adopted by companies like Apple for their mDL implementation), ISO/IEC 23220–2 “Electronic Identification (eID)”, and various blockchain approaches. While we do not believe that any one standard will be universally used, we see the potential for meta-networks, “networks of networks”, as observed in the payment sphere. For instance, the OpenID Foundation established OpenID for verifiable credentials, an attempt to ensure compatibility between these standards and the common current identification infrastructure. Over time — as we have seen with Open Banking in many countries around the world — we expect significant government and industry support for these efforts, leading to both better opportunities for consumers and new business opportunities for entrepreneurs.
With new smartphone models and significant improvements in security infrastructure and cryptography, a viable “identification stack” is emerging: 1) widespread access to mobile biometrics (e.g., facial features, fingerprints, irises, voice) that are very difficult to forge, 2) new methods using hardware as an authentication factor in simple and convenient ways (e.g., Passkeys), 3) advances in key management using tools like secure enclosures (e.g., AWS Nitro) that decrypt data only in highly fortified environments, 4) development of zero-knowledge proofs and fully homomorphic encryption (FHE), which allow the exchange of truth proofs without revealing underlying data.
Societal pressure on the current state of identification is increasing. The growth of artificial intelligence — and the political discourse around it — only intensifies public attention to data as both an asset and a responsibility. AI has the potential to be a catalyst for user-centric solutions. A vision of end user-oriented identification can take many forms, but often starts with the collection of personal information — perhaps compiling medical records, family documents, or financial credentials in a secure repository. In this world, the infrastructure of identification becomes reusable and application-independent; users decide what, when, and with whom to share, transferring identification from one application to another and revoking access at their discretion.
AI may soon use our identification data to start working for us
Imagine, for example, asking an AI agent to book a vacation for your family. The agent can gather travel data (hotels, flights, reviews, packages) from web services, but it needs you to share several pieces of your identity information, including travel preferences, travel history, payment data, budgets, family composition, names, and passports. By compiling these credentials — in some cases manually, in others via APIs (for example, with your bank, calendar, phone) — into a reusable profile (like a “data backpack” for us), you can make them available to the agent to interact with third parties on your behalf, leading to a highly personalized trip at a fraction of the cost and time. After the process is complete, you can revoke access to the information, adding new experience to your data backpack. For most people, this could be a far more efficient way of planning a trip than is currently available — cheaper, faster, more creative, and informed.
The growing need for identity verification online may be a harbinger of larger societal changes in the era of artificial intelligence. AI intensifies the challenge of identity verification in commerce and payments. Tools for creating multimedia data are attractive to criminals who have rapidly adopted AI for fraud (such as creating synthetic identities, optimizing phishing attacks, impersonating influential personalities, deceiving users). Data from anti-fraud solution providers corroborate the anecdotes we hear across our portfolio; Sift, for example, reported over an 800% annual increase in fintech account takeover attacks in Q2 2023. The battle against identity fraud is a cat-and-mouse game; we need companies that can combat artificial intelligence with artificial intelligence. Identification processors and anti-fraud tools (such as Sardine, Persona, Hive, etc) are poised for rapid growth if they can help stem the tide with pioneering work in analyzing behavioral data, device identification, and AI detection. Business identification information may prove to be a richer canvas for AI than consumer information. When we talk to portfolio companies about business registration, the responses generally boil down to how difficult and manual it is still to collect, organize, and analyze data — all tasks in which AI has the potential to be a game-changer.
If artificial intelligence creates massive increases in productivity and wealth but displaces much of the workforce, how will we redistribute wealth? How will we do this without falling prey to the justified opportunism that led to an estimated $200 billion in losses from potentially fraudulent COVID-related claims in the US alone? While consumer demand for AI agents may spur us to action, a major societal shift such as Universal Basic Income (or any variation of this concept) will likely ignite the fire we need for the complete modernization of identification.
Cybercrime is also the only global economy that we all intend to diminish. The costs of its growth are astounding. Despite companies spending over $220 billion on cybersecurity, more than 400 million people became victims of data breaches in the first nine months of 2023. In the same period, businesses faced a 70% increase in ransomware attacks compared to the previous year, with average payouts exceeding $1 million. Although we are still waiting for data from 2023, more than 1.5 billion personal records were breached in 2022. Global cybercrime will continue to grow for the same reason we are writing this letter: the value and liquidity of personal data are increasing everywhere.
[Also, Ribbit Capital believes that (digital) banks are most likely to become leaders in the field of digital identity (if they don’t get lazy and foolish). Interestingly, David Birch was also among the first to point this out a few years ago.]
(Digital) banks on the way to digital identity
We expect data banks to become some of the fastest-growing businesses in the identification sector in the coming years. Like traditional banks, the most sacred task of data banks will be to keep their assets (i.e., data) secure and ensure compliance. They will be paid for absorbing or reducing risk while maintaining data access for clients. We believe that data banks have an important role in society and can accumulate significant value over time. Data banks are perhaps best suited for creating reusable identity.
Another group of contenders we shouldn’t overlook are the banks themselves. Banks already enjoy societal trust for storing critical data. They already have direct relationships with clients with deep personal profiles, including storing and processing sensitive data. And they have impressive experience in convincing regulators that they have the best (or only!) solution to the problem.
The first line of defense — and, in our view, the investment opportunity that may be most obvious — are companies such as Stripe, Stark, dLocal, Plaid, Checkout, Stitch, and Razorpay (to name a few of Ribbit’s favorites!), which help developers and enterprises meet the requirements of real-world commerce. These companies are fintech businesses with identification operations under the hood.
Currently, banks and fintechs conduct customer due diligence (CDD) at entry and again at set annual intervals; this is costly (some banks spend over $500 million a year!), outdated, and often unpleasant for customers. A new paradigm — using automation and integrations for continuous or perpetual KYC (pKYC) — makes much more sense in today’s world. Implementing pKYC requires solving problems in technology, data management, operations, and user experience, but promises to dramatically reduce fraud and operational costs. Companies that enable this — which see pKYC as a way to solve compliance issues but also to strengthen customer value and LTV — stand to reap immense rewards.
Digital Identity is much more significant than it appears. This is part of what makes the field of identification so challenging to approach, both for innovators and investors. Governments play a critical role in identification, not only because they issue key credentials — those that allow us to access healthcare, open bank accounts, travel, drive cars, start businesses, marry, and more — but also because they provide (or fund) many of the most important services we need. Therefore, although our first instinct is often to be cautious about entrepreneurial opportunities that depend on government changes or actions, there are compelling reasons to view governments differently in the realm of identification. We see that in countries like India, Estonia, and Brazil, well-executed government digital identification systems can have a dramatically positive impact on both the public and private sectors. Change is a friend to these kinds of business processors; if government digital identifications thrive, as they have in India, it should be a boon for agile identification processors. The second area of opportunity we see comes from our expectation that governments will occasionally outsource the issuance of credentials, required for accessing valuable public spaces and services, to external organizations. Some governments will aim to fully address digital identification problems themselves, while in other cases, there might be a lack of political will to implement new digital identification systems. In such cases, we expect government agencies to enable others to address pressing identification issues.
Today’s two compelling examples are CLEAR and ID.me, both private companies that have been able to solve problems for government agencies while attracting a valuable customer base. Solving acute issues — for consumers caught in long security lines and for the U.S. TSA — CLEAR has attracted more than 17 million paid users and has managed to extend its services beyond airports, including financial KYC. Similarly, ID.me, which works with over 31 states and several federal agencies for verification and authentication for key government services such as taxes, now has over 100 million members. They are well-positioned to profit significantly from this (for instance, ID.me signed an $86 million contract with the IRS in 2021).
Don’t count out blockchain and crypto
Do not discount cryptocurrencies — they may turn out to be the best infrastructure for future digital identification. However, defining the future of identification depends not just on technology, but also on coordination. Even if we have the right design, how do we convince everyone — including governments and companies with vested interests — to change? How long will it take? We believe that cryptocurrency infrastructure will play a central role in how we capture, store, and share identification information in commerce, financial services, and beyond. But we are not there yet; among other issues, the press is still full of stories about lost keys or disappearing coins with no recourse, and crypto wallets are still complex to use, mostly designed as browser extensions, dependent on seed phrases for security, and full of unintelligible jargon. Consider that in two years, nine U.S. states have announced support for mobile driver’s licenses, while the crypto ecosystem has launched, tested, and improved a range of fundamental technologies (such as MPC-based approaches to key management, account abstraction, smart contract wallets) that make crypto wallets more convenient, secure, and private. Additionally, developers have experimented with various approaches to identification infrastructure on blockchains, from using NFT-based credentials to embedding wallets in apps and using public keys as DIDs in various configurations. Looking at this collectively, we see a good chance that central identification issues are more likely to be solved first in the realm of cryptocurrencies. For example, decentralized DNS: decentralized identifiers (pointing to one or several wallets, similar to how DNS works for web addresses) that can function as an email or social login and enable messaging across blockchains with easily shareable names. An example here is Ethereum Name Service (ENS), which has over 500,000 active names and more than 765,000 unique participants. Or — biometric decentralized identification: issuing identification on a blockchain with biometric verification. An example is Worldcoin, which has attracted over 2.8 million people from 120 countries, all of whom used the Worldcoin Orb to register by scanning their irises. We are only at the early stages, but we see such a future approaching: Telegram is implementing a wallet for its 800 million users; Nucoin now counts 13 million of its 85 million Nubank users as wallet holders.
The stablecoin market presents an interesting case study; while banking stablecoins, like USDC, are on one hand merely tokens representing dollars in a regulated financial institution, they are also highly innovative, capable of moving around the world 24/7/365, in any amount, in seconds, if not milliseconds. A tokenized KYC identification document issued by a sufficiently reliable institution could also possess this same magical ability.
Business ID and KYB: The biggest opportunity in identification over the next decade may lie in B2B networks
In most areas we invest in, it’s usually evident that B2B solutions lag 10–15 years behind consumer ones. In identification, this is easily confirmed. B2B companies typically bear the costs associated with identification during transactions (e.g., compliance, underwriting, matching, reporting, and taxes), often creating duplicative and unfocused capabilities. The KYB market alone is valued at $12 billion, the B2B credit reporting market today is valued at an additional $8 billion. Larger markets around organizing B2B identification information are much bigger — the global accounting and auditing market is about $220 billion. While we’re not the first to notice the opportunity in B2B identification, there are good reasons to believe that now is the right time. And the pain is palpable; for example, the average bank registration time for a corporate client takes over four times longer than for a consumer. As B2B commerce grows and financial instruments are implemented, significant opportunities exist for companies like Middesk or Coris, which help in KYB, underwriting, and risk management, as well as for companies like Rutter, which provide a growing volume of B2B identification data to hundreds of software platforms. And perhaps we’re most excited about processors like Duna, with ambitions to create reusable identification wallets in B2B, where we believe the idea may be even more powerful than in the consumer sector. Compared to consumers, B2B identification data is naturally more disparate. Business identification is indeed a vast topic, and we’re just touching the tip of the iceberg in how enterprises unlock the context needed for more efficient money management. Many of the opportunities discussed in this letter — the shift to continuous pKYC, the potential for opening networks in credential issuance — are likely even greater in B2B than in B2C. We could write a whole letter about it — let us know if you need more information on this section.
For us, the answers, at least at a high level, are clear. As money and data become more deeply intertwined and interwoven, big changes are coming. And while we don’t know exactly what it will look like, expect us to be tirelessly working to uncover it — and, as always, looking for vision from the entrepreneurial entrepreneurs who will ultimately show us the way. If you happen to meet one of them, you know where to find us!”
P.S. One more interesting step in the world of digital identity (and metastates): Balaji Srinivasan Launches Revolutionary Fund, Aims to Democratize Venture Capital
In a groundbreaking move that is set to change the venture capital landscape, Balaji S. Srinivasan, a renowned angel investor and former CTO of Coinbase, has launched the Balaji Fund. This initiative, announced via Srinivasan’s Twitter and various media platforms, signifies a major shift towards democratizing access to venture capital. Srinivasan’s track record in the startup world is nothing short of stellar. He has invested in a wide range of successful startups like Akasa, Alchemy, and Digital Ocean, and played a pivotal role in early investments in major crypto protocols like Bitcoin and Ethereum. His fund is set to scale up seed investing across various domains, including crypto/web3, deep learning, and augmented reality, among others.
The Balaji Fund, which boasts an impressive roster of backers including Naval Ravikant, Coinbase CEO Brian Armstrong, and venture capitalist Fred Wilson, is not just another investment fund. What sets it apart is its structure as a 506(c) fund. Unlike traditional 506(b) funds that are limited to private fundraising, a 506(c) fund allows public solicitation and advertising, offering unprecedented access to a broader investor pool. The fund terms are tailored to make venture capital more accessible. With a minimum commitment of $10,000 per quarter and a commitment period of 10 quarters, it opens doors to a wider range of investors. The management fees are set at 2.5% with a graduated carry of 25–30%, creating a viable model for both the fund managers and investors.
This new fund is not just an investment vehicle; as Alex Pattis wrote, it’s a statement about the future of venture capital. By leveraging the 506(c) structure, Srinivasan is championing a more inclusive approach to investment. His fund is among the few, alongside Jason Calacanis, aiming to raise over $50 million, targeting not just institutional but also non-accredited investors. This approach could revolutionize how individual investors engage with venture capital. Traditionally, the domain of high-net-worth individuals and institutions, venture capital has been largely inaccessible to the average investor. The Balaji Fund challenges this status quo, offering an opportunity for a wider audience to participate in funding innovative startups.
Srinivasan’s vision extends beyond just funding startups. The fund aligns with his concept of “Network States” (or “metastates”) — libertarian societies built on the principles of decentralization and autonomy, a theme resonating deeply within the crypto and tech communities. This fund aims to seed not just companies but potentially new forms of societal organization. The launch of the Balaji Fund is more than just the inception of another investment fund. It’s a bold step towards democratizing venture capital, offering unprecedented access to investment opportunities that were once the exclusive domain of the wealthy and connected. With its innovative structure and Srinivasan’s visionary leadership, the Balaji Fund is poised to be a catalyst for change in the venture capital industry.
