Why do we need a decentralized digital ID standard?
Establishing decentralized standards for digital identity will make business dealings easier on a global scale
Trust in a trustless ecosystem — that is what blockchain essentially is. With distributed consensus mechanisms and an immutable ledger, the platform provides a means for parties to transact without a centralized intermediary.
However, therein lies possibly one of the biggest drawbacks that blockchain and cryptocurrency have — at least in terms of real-world use cases. Transactions are pseudo-anonymous. Hence, even if blockchain were to be inherently secure, there is always the potential for illicit use or even fraud with certain use cases.
Fungible use-cases for crypto
One thing that complicates matters is the fungible nature of digital assets — meaning, there can be monetary value attached to digital assets, whether they are convertible directly to fiat currency, or whether they are digitized from other real-world asset such as property or equity.
This essentially means that digital assets — such as cryptocurrency, tokens, or tokenized assets — can be used as a mode of payment or a replacement for money, e.g., cash or something of monetary value. And when there is the possibility of value exchange, there are also the risks of illicit usage such as criminal transactions, theft, or even money laundering.
There is a reason why the financial system is so strict with the know-your-customer (KYC) process. It is part of due diligence, and it ensures that financial institutions maintain their reputation by mitigating suspicious activities. Due diligence also protects against data fraud, extortion, illegal tax avoidance and terrorist funding, among others.
In the recent times, there have been two emerging global and regional regulatory frameworks (among many others) that seek to standardize the way businesses do KYC. One is the European Commission’s AML5, or the Fifth Anti-Money Laundering Directive, and the 2019 Financial Action Task Force (FATF) Guidance for Virtual Assets and Virtual Asset Service Providers.
AML5 establishes a digital space for user identification and authentication. It essentially homogenizes the KYC process for businesses and users, ensuring seamless access as opposed to a fragmented approach to KYC.
Meanwhile, the FATF guidance establishes how jurisdictions that are party to the FATF’s anti-money laundering and anti terrorist financing Recommendations will deal with digital assets such as crypto.
Alexandre Kech, Co-Founder and CEO of Onchain Custodian, has shared his insights regarding the importance of digital identity, compliance, and KYC, in the context of digital assets:
“Our main focus here is to make sure funds and transfers are not used for illicit or illegal purposes. There is a technology that has been built to track the frequency at which certain illegal entities have been exposed to/interacted with. That makes it easier to identify the different parties that have interacted with these blacklisted addresses.”
He adds that blockchain and crypto companies are still addressing challenges in terms of building technologies that interface with digital ID systems:
“[The] challenge here is implementing the FATF regulations around the travel rule that will require virtual assets/providers to provide customer information for any transactions that are made out of a respective platform. While banks can do this easily, presently in the crypto industry we don’t have SWIFT technology or similar to track these transfers and confirm customer identity. We need a global solution for this, to prevent customers from having to sign up to over 10 different services just to make transactions to different parties.”
A use case for decentralized digital ID
Perhaps one way that such decentralized technologies can be tried-and-tested would be to implement it across a scale that spans geography, financial systems, and even practical/cultural usage.
For instance, the Greater Bay Area (GBA) initiative was announced in early 2019 as an ambitious plan to bolster economic growth in China and its special administrative regions by closely integrating 11 cities — Hong Kong, Macao, Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong.
With around 55,000 square kilometers and almost 70 million people — that’s thrice the size and 10x the population of the San Francisco Bay Area! — the GBA is a melting pot of talent and culture, and it will be a testbed for technologies in terms of interlinking technical and financial infrastructure.
This region will be home to a GDP of around $1.5 trillion, and policy initiatives will cover more inclusive growth not just in tech and business, but also health services, transportation, tourism, youth development, environmental protection, education, and culture.
The huge population and geographic area will be a challenge, however — along with the differences in legal, financial, and technology jurisdictions in each of the cities. There are different economic systems, taxation, prices, and legal systems that need integration.
One thing that can help accelerate these initiatives is by establishing a standard for digital identity — which is expected to make business dealings easier across the region.
Emil Chan, Chairman of FinTech Committee at the Smart City Consortium says there were initial plans to have a common ID standard between Hong Kong and Shenzhen, but this would now have to be expanded to a bigger scale. “This presents an opportunity to explore the possibilities with blockchain,” he said. “If it were only in one city, it might not be that impactful to every day life, but when taking a lot of different cities, it makes a very big difference,” he shares.
Due diligence is usually considered a roadblock in doing business, such as long identity verification processes needed in opening bank accounts. Charles Lam, Senior Manager for Fintech at Cyberport, says traditional systems would sometimes take weeks, thus significantly slowing the ability of startups to launch. “With digital identity technology, the process of authentication can be accelerated.”
Lam adds that this would be a benefit to both institutional and individual users. “Previously, only those with significant assets were able to do investing and financial planning in the Greater Bay Area, but by establishing a digital identity, people can prove their identity to banks and businesses, and they can thus access financial services.”
Why we need a decentralized approach
Hans Lombardo, Co-Founder of Chain of Things and Blockpass, says that simply establishing a digital ID will not be enough. While digital ID standards have a scope and use cases beyond blockchain, a decentralized approach provides a way to implement a permissionless digital ID standard, which means it can be utilized by any party or application for identification and authentication without relying on a centralized authority to manage the platform.
A decentralized platform provides a more robust and secure framework that government, businesses, and end-users, can utilize. A self-sovereign capability also means there is no single entity (whether government, corporation, or organization) that controls this data. Lombardo says:
“It’s absolutely essential to talk about Digital Identity framework that is decentralized, self-sovereign and user-centric. Right now, the internet is centralized, and too much identity data are controlled by a few companies. What needs to be done is to develop a digital identity standard that’s decentralized, in the control of the users.”
Through blockchain, identity verification is stored as a cryptographic representation of a user’s verified identity based on a blockchain whitelist. Actual data is stored on the user’s mobile device and shared only with approved entities — giving users better control over their personal data.
Digital ID can also include more than just identity information, but others, such as biometrics — which will be difficult to defraud.
Alex Hung, Chairman of HK New Emerging Technology Education Association, shares that what’s important at this point is interoperability.
“The key is to establish ways for systems to better communicate with each other, and a decentralized approach will provide a solution.”
This certainly makes it faster to authenticate for purposes of financial services. “Creating digital identities eliminates the need for identity certificates or paper IDs.”
Cost-effective and user-centric use cases
Decentralized ID will be cost-effective for businesses and convenient for users. “Once you have established your virtual account, you can use your digital identity across other protocols because you have already done the KYC process,” says Lombardo. “Traditionally, banks must do authentication every time someone opens an account, which increases the cost for the bank. With decentralization, you can store your data on your own mobile phone, which makes the process faster and more convenient.”
It’s all about value
The ubiquity of connected devices makes it even more appealing, and it is a matter of making the technology essentially invisible, so that it is more straightforward from both user and platform perspective. Human-computer interaction plays a big part in success, and since everyone now has a smartphone, it makes it easy to bring your digital identity everywhere you go.
The value proposition for decentralized digital ID is thus shared across businesses, governments, and end-users. There are a myriad use cases beyond fintech. It involves more efficient delivery of services and greater economic activity — which has a great potential use case from both regional and global perspectives.
Featured Image Credit: Unsplash
Featured in this story
Elevate interviews experts in technology to gain their insights, with the goal of sharing knowledge with the community. Please get in touch with us to contribute, engage our experts, or become part of our network.
Alexandre Kech is Co-Founder and Chief Executive Officer at Onchain Custodian. Formerly the Head of Securities & FX Markets, Asia Pacific at SWIFT, he co-founded Singapore-based Onchain Custodian as a global, standardized, resilient, and compliant platform for the safekeeping of institutional digital asset investments with incomparable user experience. The solution is flexibly built to meet the possible futures of digital asset custody.
Hans Lombardo is a successful entrepreneur and enthusiastic proponent of blockchain technologies. He is a co-founder of Blockpass, a self-sovereign identity system and KYC-as-a-service provider. He is also a co-founder of Chain of Things, a Hong Kong-based startup integrating blockchain & IoT devices. In 2012, he sold his previous company, a data collection and analytics research firm focused on mainland Chinese high-technology industries. He is an Internet industry veteran with regional management experience. During the Internet boom, Hans managed the internet.com Venture Capital Fund in Asia, investing in a number of Internet startups in Greater China. As a tech journalist in the late 1990s, he interviewed Jack Ma, Jerry Yang, Vinton Cerf and Richard Li Tzar Kai. Hans earned a Ph.D. degree from the University of Hong Kong in 1997 and a Sir Edward Youde Memorial Fellowship in 1995–1996.
Emil Chan is a FinTech evangelist with over 20 years experience in managing IT and business transformation projects in international financial institutions. He had worked for several sizeable international banks including Credit Suisse and BayernLB as the roles of First Vice President, Head of IT in Asia Pacific, Project Director and Operations Manager AP. He has extensive experience in both Business and IT consulting encompassing the design, setup, leading and managing of cross-border projects throughout Asia. He is the visiting and adjunct lecturer as well as advisor of various departments of local universities including HKU, PolyU, CityU, Hang Seng U, Lingnan U and VTC.
In the past 10 years, he participated actively in voluntary community services in related to popular adoption of technology. He is the founding Chairman of the Association of Cloud and Mobile Computing Professionals, The FinTech Committee Chairman of the Smart City Consortium, Vice Chairman of Hong Kong New Emerging Technology Education Association and the Honorary Chairman of StartHK promoting proper usage of Cloud and Mobile, the developing digital banking ecosystem, STEM education as well as the adoption of startup culture in Hong Kong. He is a mentor of the HK Cyberport Mentors Network, Guangzhou CP-Nest Incubator of Chinese Academy of Sciences and Chief Judge of the HK ICT Startup Award 2019. In order to unleash Hong Kong’s potential and play a new role in the Greater Bay Area, Emil also hosts seminars, delivers public speeches and publishes articles of FinTech related topics on local newspapers and interviewed by various media from time to time.
Charles Lam, Senior Manager for Fintech at Cyberport, is a hungry game changer who constantly reimagines and redefines new solutions for Financial Industry. Focused on driving real customer and business value together with FinTech startups and aiming to disrupt the status quo, rebuild new model that create new revenue stream and create the best digital transformation. This can be done by identifying and creating new business value by actively collaborating & bridging the gaps between parties and key stakeholders in the fintech community. Last but not least, Charles is also the deal maker between funding side (Angel, VC, PE) & solution provider (start-ups).
In short, Charles is trying to make Hong Kong the best FinTech & Blockchain hub in the world.
Unlike traditional business units, his job requires him to function like a startup, sprint like a startup and work in an environment that thrives on adrenaline. He runs constant experiments, count failure as learning points and constantly strive to do things differently to improve organisational agility. Building FinTech & Blockchain ecosystem is profession and a hobby. Leading by example and strive for great accomplishments is a passion.
Alex Hung, Chairman of HK New Emerging Technology Education Association, has expertise in Web3.0 (enhance Web2.0 business model + social network + mobile computing + pervasive computing + Artificial intelligence).
He has strong practical experience in business consulting , information system consulting, datawarehousing and Business Intelligence.
Over 18 years of experience in Business Consulting and Information and Communications Technology industry. He accumulated extensive IT expertise and broad industry knowledge, with both technical and business perspectives.
Alex has delivered a number of speeches and talks oversea, such as New York, Abu Dhabi, India, New Zealand, Beijing, Shanghai, Guangzhou, etc. Locally, he delivered talk for Science Park, Cyberport, and HKU regularly and has been the Guest Speaker of the 4th Mainland-Hong Kong Services Industry Symposium and the International Project Management Forum (IPMF) 2009, 2012.