Why Decentralized Identity Could Be the Key to Accelerating Digital Assets Adoption
By Chaitanya Konda, Fireblocks Senior Technical Product Manager
After a challenging couple of years, the digital assets industry is experiencing something of a renaissance as investor confidence returns. The SEC’s approval of spot Bitcoin ETFs earlier this year has fueled a surge in record-breaking bitcoin prices and market momentum. While optimism is high and market cycle indicators point to the start of a bull run, crypto sceptics are questioning whether this surge in interest can be sustained, ultimately lead to further adoption, and help the industry shake off fears around consumer protection and safety.
Now is the time to reset security standards
While this momentum should be heralded as a turning point, it’s important that the industry seizes this opportunity to reset standards for compliance, security and consumer safety, and take crucial steps towards legitimising this new asset class. With the advent of tokenized securities, fiat-backed stablecoins and central bank digital currencies (CBDCs), we are venturing into the world of consumer protection backed by regulators who mandate identity-based AML/CTF compliance.
For digital assets to continue to remain a reliable store of value, and to drive long-term adoption, it is crucial for investors to know their assets are secure and their value will be maintained. This includes preventing illicit financial activity and doubling down on consumer protection which are fundamental for building further trust in the space. Therefore, strategic investments into the development of advanced technologies, such as decentralized identity and programmable compliance solutions, are essential to help enhance the integrity of the digital assets ecosystem and meet the challenges of privacy and data security head on.
Decentralized identity can move the needle
A large group of institutions are working to define the standards and guidelines required by the different components of a new type of identity framework called decentralized identity. Decentralized identity can have a transformative impact and provides a way to maintain full control and ownership over personal data, shifting the way users interact in the digital and financial realms.
By leveraging the building blocks of self sovereign identity, including Decentralized Identifiers (DIDs) and Verifiable Credentials (VCs), decentralized identity streamlines user onboarding and simplifies the identity verification process. Credentials can be issued to a subject against these DIDs which hold claims about the subject that are cryptographically verifiable (for instance, claims are attestations of a property for an entity, such as Person A is a citizen of country B).
Moreover, it enables seamless cross-border transactions, reduces friction and opens up new opportunities for businesses and individuals. For example, the tokenized securities ecosystem is still constrained as investors can only buy and sell from issuers of these tokens, but not between each other. The real game-changer lies in decentralized identity’s ability to open these walled gardens to create a seamless token ecosystem, whilst combatting scams and fraud. Decentralized identity establishes a trust layer that mitigates these risks. By leveraging the transparency and immutability of the blockchain, it enables verifiable and trustworthy identity verification processes. Illicit users can reasonably be locked out of the system, empowering individuals to engage in digital transactions with confidence.
But there are still hurdles to overcome
To fully realize the potential of decentralized identity, collaboration is key. Governments, regulatory bodies and industry players must unite to establish regulatory frameworks that encourage innovation while safeguarding consumer rights. Ongoing initiatives and partnerships, such as those led by the Internet Identity Workshop, Decentralized Identity Foundation, World Wide Web Consortium (W3C), Trust over IP (ToIP), and the Hyperledger Foundation, are paving the way for the adoption of decentralized identity standards and best practices. By working together, we can create an environment where safety and consumer protection thrive.
In the European Union, the Electronic Identification and Trust Services 2.0, or eIDAS 2.0, is a regulatory framework designed to align with the Path to Digital Decade initiative, aiming to enable 80% of EU citizens to use digital identification by 2030. It introduces measures for the creation of the European Union Digital Identity wallet (EUDI), explicit consent for sharing personal information, cross-border authentication, and more. The eIDAS 2.0 framework paves the way for decentralized identity, and it is encouraging to see these developments already happening at a supranational level. eIDAS 2.0, along with GDPR, sets the stage for a privacy and user-centric identity in the EU that the digital era has previously been missing.
Decentralized identity can help shape the industry’s future
Emerging technologies such as zero-knowledge proofs, privacy-preserving protocols and decentralized data marketplaces hold immense potential. These advancements can further enhance the security and privacy of decentralized identity, ensuring personal information remains under the control of individuals and preserving the integrity of the digital assets ecosystem as a whole.
W3C, an international standards organization for the World Wide Web, continues to make significant progress, including creating technical standards and guidelines for web technologies, such as DIDs and VCs, however there is still much left to be done to avoid recreating identity walled gardens by adopting universal standards for DIDs, VCs and credential schemas within the digital assets and web2 ecosystem. It will be central to building an interoperable, portable, safer and more trustworthy digital assets ecosystem.
About Fireblocks:
Fireblocks is an enterprise-grade platform that delivers a secure infrastructure for moving, storing, and issuing digital assets. Fireblocks serves thousands of financial institutions and has secured the transfer of over $4 trillion in digital assets. They provide the simplest and most secure way to work with digital assets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.