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Terraform Labs CEO Do Kwon Faces Extradition to South Korea

Terraform Labs CEO Do Kwon Faces Extradition to South KoreaAccording to a report published by AFP, Do Kwon, CEO of Terraform Labs, has been charged with document forgery in Montenegro. Kwon was arrested at the Podgorica airport while traveling with fake documentation. South Korean prosecutors have said the Terra co-founder faces extradition to South Korea. Montenegro Police’s Account of the Falsified Travel Documents Found […]

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Soulbound tokens power new identity solution on Celo blockchain

Masa Finance announced its deployment on the Celo blockchain with its new “Prosperity Passport” identity solution for users.

A central focus for many in the Web3 community has been improving identity solutions available to consumers. Last year the emergence of soulbound tokens (SBT) introduced a new way for users to define themselves. 

Although the SBT hype quieted over the last months, they have not disappeared off the scene. On Mar. 1, the SBT protocol Masa Finance announced that it will deploy on the carbon-negative Celo blockchain to create a new identity solution. 

More than 10 million wallets active in the Celo ecosystem will be able to generate a Masa “Prosperity Passport.” This new Web3 identity solution allows users to mint a variety of SBTs related to their digital life, such as an authenticated user verification SBT, a credit score SBT, a community reputation SBT and a .celo domain name SBT.

Calanthia Mei, the co-founder of Masa Finance said nonfungible tokens (NFTs) were the first pioneers for Web3 user customization, and SBTs are the next breakthrough technology.

“Web3 has a trust issue, and SBTs represent a composable and scalable way to build a trust layer between projects and users, and users amongst each other. “

The “Prosperity Passport” solution also gives access to other utilities from Celo projects which have integrated the technology, such as micro loans and universal basic income.

Mei believes that the identity solutions provided by SBTs will help usher in the next 1 billion authentic users into Web3.

“We see SBTs as a way to build bridges for global economies, industries, and users to merge with web3 and truly usher in the new economy."

According to the announcement, the protocol already has 250,000 Masa Soulbound Identities minted, along with nearly 300,000 Masa .Soul Names minted.

Related: What is decentralized identity in blockchain?

At the end of 2022, MetaMask Institutional, Cobo and Gnosis DAO all teamed up to create an SBT project to bring exclusivity and identity verification to its users. Back in December, the Japanese financial firm Sumitomo Mitsui also revealed it is looking into SBTs for social reasons.

These new digital assets are thought to be a possible solution to future digital identity in the metaverse, along with digital citizenship.

While not directly mentioning digital assets, on Feb. 9, the European Union mentioned using zero-knowledge proofs for future digital IDs.

Circle announces USDC launch for Cosmos via Noble network

Argentina Organizes National Blockchain Committee to Implement State Level Strategy

Argentina Organizes National Blockchain Committee to Implement State Level StrategyThe government of Argentina has designated a national blockchain committee in order to establish the directives for a state-level blockchain adoption strategy. In a document, Argentina remarks on the importance of this tech for the future and presents several use cases that would benefit from the introduction of blockchain for the digital transformation of the […]

Circle announces USDC launch for Cosmos via Noble network

Swiss Financial Watchdog Releases Revised AML Ordinance, Clarifies Crypto Requirements

Swiss Financial Watchdog Releases Revised AML Ordinance, Clarifies Crypto RequirementsThe Swiss financial regulator has published its updated anti-money laundering (AML) ordinance, noting it’s extending the coverage to include blockchain trading platforms. It also clarified certain reporting and identification requirements that apply to crypto transactions. Financial Authorities Adjust Swiss Anti-Money Laundering Rules Concerning Crypto Transfers Following consultations that started earlier this year, the Swiss Financial […]

Circle announces USDC launch for Cosmos via Noble network

Are decentralized digital identities the future or just a niche use case?

Are decentralized digital identities the future or are they a niche use case for blockchain technology doomed to solely be used by crypto natives?

As users take advantage of online services and explore the internet, they eventually create a digital identity. This type of identity is then tied to central entities like Google and Facebook, which make it easier to share data with new services through simple sign-in buttons.

While these digital identity management systems are convenient, they are relying on centralized intermediaries that hold and control user data. Personal identifiers and attestations are in their hands, and they can decide — or be forced — to share this information with other parties.

Blockchains offer a solution: decentralized digital identities. These allow individuals to manage information related to their identities, create identifiers, control who they’re shared with and hold attestations without relying on a central authority, like a government agency.

A decentralized identifier for a decentralized identity can take the form of an Ethereum account. Users can create as many accounts as they want on the Ethereum network without anyone’s permission and without anything being stored in a central registry. Credentials on the Ethereum blockchain are easily verifiable and tamper-proof, making them extremely trustworthy.

Other use cases are out there. In August 2022, Binance catapulted the decentralized identity debate to social media platforms after moving to launch its first soulbound token, BAB, serving as users’ Know Your Customer (KYC) credentials.

Whether decentralized identities are the future of online activity remains to be seen.

Managing decentralized identities

Speaking to Cointelegraph, Witek Radomski, chief technology officer and co-founder of nonfungible token ecosystem Enjin, revealed he sees a future in which the metaverse will see a “blend of social media networks, email, crypto wallet addresses, and decentralized applications,” suggesting there will be a mix of digital and decentralized identities.

Per Radomski, the key to identity management will be the “preservation and protection of sensitive information,” as different networks have “distinct technical methods to track digital ownership of data.”

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Radomski added that individuals entrusting protocols with their personal data should consider that big business decisions will be made based on an enterprise’s needs and philosophy, adding:

“The ownership of digital assets mimics asset possession in the physical world. Assuming that owners are operating within the bounds of the law, blockchain-enabled digital ownership cannot be interfered with by the government.”

He added that decentralized identities will play a role in preserving individuality, which will “depend on proving that you’re not a bot” and will have online activity as one of the “most compelling testaments to demonstrate this.”

The potential of decentralized identities

Managing digital identities is a challenge, as one mistake can easily lead to a breach of personal information. Centralized entities have been known targets, with a recent case seeing the personal data of Portugal’s president stolen in a cyberattack. The use of decentralized identities eliminates this risk, as only the users are responsible for their data.

Speaking to Cointelegraph, Dmitry Suhamera, co-founder of IDNTTY — a decentralized public infrastructure layer enabling a decentralized identity approach — said that centralized digital identity providers “compete with each other, which actually hinders widespread adoption,” as in the end, “the user needs an ID for government services, an ID to interact with a bank, an ID to work with a cooperation.”

Real-world use cases have seen digital identity programs’ adoption slow down shortly after launching, with Suhamera using Gov.UK Verify in the United Kingdom, which saw less than 10% of the population signing up, as an example. Nigeria’s adoption of eID, Suhamera added, stalled in 2017 amid issues with public-private partnerships used to launch the program.

Per Suhamera, centralized digital identity solutions tend to “be quite expensive and offer an inconvenient monetization model” as users have to buy and pay for national IDs before using them digitally.

Cross-border uses of digital IDs are also complex, Suhamera added, as corporations and regulators have to line up bureaucracy, which can be a slow process. Suhamera added:

“Decentralized ID allows for the creation of a distributed ‘cheap,’ easy to integrate repository of personal ID (for which only the user is responsible) with which any service can integrate, from KYC providers and digital signatures to any online or identity services.”

While decentralized identity can make identifiable information more portable while keeping it safe, centralized entities managing digital IDs “tend to provide a set of services at once,” boosting user experience.

Decentralized identities have a number of use cases, including the potential for universal logins across a number of applications without the use of passwords. Service providers can issue attestation tokens granting users access to their platforms after a single sign-up, for example.

Binance’s soulbound token shows that user authentication and KYC is also a possibility on the blockchain through the use of non-transferable tokens. Because these tokens aren’t transferable, voting through the blockchain without manipulation is a real possibility.

Security concerns

While decentralized identity management does appear to have significant advantages, the technology does not come without its drawbacks. For one, self-sovereignty means it may not be the most user-friendly approach.

Speaking to Cointelegraph, Charlotte Wells, communications manager at crypto platform Wirex, said digital identities have been around for some time, although blockchain-based digital identities will “be a game-changer in the future web 3 due to their decentralized nature.”

Wells pointed out that the amount of user data stored online is steadily growing, creating “huge security concerns over how this data will be stored and who will have access to it.” She pointed to data breaches at Facebook, which exposed the data of millions of its users. Per her words, decentralized digital identities will be “vital in allowing us to have ownership and control over our credentials.” Wells commented:

“Self-sovereign identities use blockchain technology and zero-knowledge proofs to store digital identities on non-custodial wallets – the biggest advantage being that users have complete control over this and decide what companies, apps and individuals have access to this data.”

She added that there are drawbacks: One important role of centralized entities is “enforcing standards of regulation, giving users and businesses the reassurance they need to work on the web.” Without these central authorities, Wells concluded, there may not be the same level of protection for decentralized identities.

Zero-knowledge proofs are a way of proving the validity of a set of data without revealing the data itself. This technology, paired with decentralized identities, could mean users can prove who they are while under pseudonyms, ensuring their security isn’t affected.

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To Fabrice Cheng, co-founder and CEO of Quadrata, blockchain-based digital identities are going to change the concept of digital IDs and create new use cases for the Web3 space. Speaking to Cointelegraph, Cheng noted that it is still important to be mindful of what’s shared, noting that people should “be aware o their behaviors on the blockchain.”

With the Ethereum blockchain acting as a global directory for decentralized identities of users who choose what they share and are in control of their data, it’s hard to imagine a scenario in which crypto-native users wouldn’t prefer this alternative. Non-crypto native users, however, may prefer to keep using centralized providers and share their data, at least until the user experience becomes as simple.

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Reinventing yourself in the Metaverse through digital identity

Metaverse users can reinvent themselves with a digital identity built upon avatars and digital assets, but there are challenges to consider.

The Metaverse has become one of the biggest buzzwords of the year as a number of brands, companies and even countries begin to explore virtual worlds to conduct business. Even though Metaverse development is still underway, a recent report from the technology research and advisory firm Technavio found that the Metaverse will hit a market share value of $50.37 billion by the year 2026. 

Another report predicts that the growth of the Metaverse will be driven by e-commerce, which is expected to reach a market share of $60.47 billion by the year 2026. E-commerce across social media platforms is also expected to increase over the coming years, which may suggest that the Metaverse will advance as the next generation of social networking. Therefore, it shouldn’t come as a surprise that a number of Millennials and Gen Zs are currently showing interest in the Metaverse.

Digital identity is key to the Metaverse

Findings from the “Digital Ownership Report 2022” from the Metaverse platform Virtua report show that younger generations are particularly excited by the potential for reinventing themselves in virtual worlds that allow for the creation of digital identities and ownership. For instance, the report found that 63% of American millennials expect the Metaverse to help them reinvent themselves, while 70% of Americans surveyed agreed that digital items like clothing and artwork are already an essential part of their identity.

Jawad Ashraf, CEO and co-founder of Virtua, told Cointelegraph that the ability for individuals to reinvent themselves is a key feature of the Metaverse:

“Many people today have reinvented themselves on social media, as they are projecting an image that is still personable and interactive. The Metaverse allows users to express themselves through an avatar, allowing each person to be themselves without the fear of face-to-face interaction.”

According to Ashraf, people will be able to express themselves much more freely in the Metaverse in comparison with Web2 social media platforms like TikTok and Instagram. He believes this is the case due to the fact that users will be able to customize avatars to portray themselves while leveraging digital assets that they own. He added that every aspect of Virtua’s metaverse is customizable, allowing users to create their own avatars to reflect their “digital identities.”

Example of a customizable avatar in Virtua’s Metaverse. Source: Virtua

Janice Denegri-Knott, professor of consumer culture and behavior at Bournemouth University and a researcher behind Virtua’s digital ownership report, told Cointelegraph that there is not yet an official definition for digital identity within the context of the Metaverse. However, she believes that if digital identity is thought about pragmatically, it can be defined as “the unique, identifiable information that is connected to a person when online.” As such, the concept of digital identity, in this case, extends much deeper than customizing an avatar to resemble oneself. Denegri-Knott elaborated:

“The Metaverse with its blockchain infrastructure affords users the potential to assume greater ownership rights over their own data, giving them more control over the information they share with others. The beauty of the Metaverse is that a user can have different digital identities, such as a workplace identity, sporting identity and personal identity, while all still being based on the user’s real-world identity.”

Denegri-Knott added that she believes the idea of individuals extending themselves digitally is an instructive one. “Rather than thinking of digital identity as being separate from, but rather connected to an ‘offline/real’ identity is helpful. This will allow us to see how our sense of self may be ‘digitally’ extended in our ability ‘to do’ and to ‘express ourselves,’” she explained.

With this in mind, Denegri-Knott pointed out that the digital items that users own in the Metaverse will play a fundamental role in the development and expression of self, just as material items help people achieve intentions and goals in the physical world. This was highlighted in Virtua’s report, which found that 70% of consumers feel their digital items help create the perception of who they want to be. Moreover, 75% of surveyors expressed that they were emotionally attached to the digital items they own in the Metaverse.

Related: NFTs and intellectual property, explained

Echoing this, Chris Chang, co-CEO of ZepetoX — an Asia-based metaverse initiative – told Cointelegraph that similar to how real-world objects encapsulate a person’s physical space, digital assets in the Metaverse provide clues about a person’s tendencies. “The Metaverse is a setting wherein one can explore relationships and identities different to the physical realities that one is born with,” he said.

This aspect is particularly important, as Denegri-Knott further explained that avatars within the Metaverse can help individuals achieve goals that are perhaps inconceivable in the real world:

“One of the first cases I reported for Virtua was that of an avid Second Life member who lived in squalor, but who in Second Life led a successful life and lived in a palatial home. In our digital avatars we can realize the blocked goals in our physical lives and achieve the status that is denied to us.”

Trust and privacy challenges of digital identity

Although digital identity is a key feature behind the appeal of the Metaverse, a number of security issues are still associated with this concept. Andreas Abraham, project manager of Validated ID — a project collaborating with the European Commission on their blockchain identity initiative — told Cointelegraph that reinventing who you are means reconsidering values, activities and possibly changing behavior. Given this, he believes that the Metaverse will allow every person to define from scratch who they are and who they wish to be.

Yet, this could lead to multiple issues including trusting if an avatar is who they claim to be. Fortunately, there are solutions to combat these challenges. Fraser Edwards, CEO of cheqd.io, told Cointelegraph that self-sovereign identity, or SSI, may come to the rescue. According to Edwards, SSI is often known interchangeably as “decentralized identity,” which allows individuals to have ownership and control over their data.

In the case of avatars within the Metaverse, Edwards noted that these are moving data points capable of forming decentralized reputations. “Avatars in the Metaverse will collect online social proofs, meaning the interactions between them can act as proof for determining which ones represent good individuals (or not) while staying anonymous,” he said. In other words, this allows for anonymity while creating an element of trust: “Even if an anonymous developer exists solely in a Metaverse they could build social proofs through interactions and hence reputation with SSI.”

Related: Blockchain and NFTs are changing the publishing industry

Moreover, Edwards pointed out that while some Metaverses allow users to customize their avatars based on fictional 3D characters, some are leveraging “photo realistic” avatars. For example, Union Avatars, a Barcelona-based virtual identity Metaverse platform, is applying real-life images to represent a user’s avatar in the Metaverse.

Cai Felip, CEO of Union Avatars, told Cointelegraph that a photo-realistic avatar is a 3D virtual representation of a user’s real-world self-based on their actual image: “By leveraging computer vision technology, we have created a solution that can generate a full-body avatar from a single selfie taken with your webcam or uploaded to our webapp.” Tina Davis, chief creative officer of Union Avatars, added that photo-realistic representational avatars are used in industries where it is crucial to present oneself as they are in real life. “These fields are typically those of medicine, business, education and travel,” she remarked. However, Davis noted that the gaming industry is starting to witness broader use cases as more people adopt their virtual identities.

Photo realistic avatar of Cai Felip. Source: Linking Realities 

While innovative, protecting user data also becomes an issue in the Metaverse. Dawn Song, founder of Oasis Labs and a professor at the University of California at Berkeley, told Cointelegraph that seemingly anonymous metaverse platforms may still be able to collect user data. “As an example, in our research, we have shown the new privacy risks of the Metaverse. We need new technical solutions to better protect users' privacy,” she said. In order to combat this, Song explained that Oasis Labs recently developed a decentralized anonymous credential system with an on-chain verification to enable users to prove the properties of their identity while maintaining privacy.

“In our system, we can provide practical on-chain verification for the first time, achieving both privacy and accountability. The system, known as SNAC, has the ability to allow users to show know your customer certificates while remaining private.” SNAC uses zk-SNARKs and smart contract capabilities to verify anonymous credentials, she explained. Song added that Oasis Labs created a new solution called “metaguard” to provide an incognito mode for users in the Metaverse.

How digital identity will advance

Despite challenges, digital identity in the Metaverse will continue to progress in meaningful ways. For example, Sebastien Borget, co-founder and chief operating officer of The Sandbox, told Cointelegraph that digital identity in the Metaverse will expand to allow for interoperability within other virtual ecosystems: “Users will want to bring more than just the visual appearance of their avatar from one virtual world to another. They will also want to carry their online reputation, progression and achievements with them.”

According to Borget, digital identity will continue to build as users spend more time within the Metaverse, whether that be within gaming environments, through virtual events or in online workplaces. “Users should be able to use all their data as proof of who they are online. This will contribute to defining an individual's true digital identity (or multiple ones since there can be many),” he remarked. Borget added that a user’s digital footprint will soon become important within other sectors, like decentralized finance (DeFi):

“Even in DeFi, a crypto exchange can loan you more to buy a land if you prove you actually spend time building and playing in the metaverse. And you don’t want that data to be held in just one virtual world — in the true spirit of Web3, users shouldn’t have to be locked in one walled garden platform to carry out their history and reputation.”

Moreover, while it’s too early to tell, the importance placed on a user’s digital identity may help decrease the amount of illicit activities expected to take place in the Metaverse. For instance, Song noted that having a decentralized identity attached to other aspects of life like bank accounts could add far more functionality to the Metaverse: “Still, we need to ensure better privacy and data sovereignty for individuals if they are to use the Metaverse truly.”

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First Binance soulbound token BAB targets KYC user credentials

Binance's new Binance Account Bound token is aimed at many use cases in the decentralized society but will initially only serve as Binance KYC user credentials.

Binance cryptocurrency exchange is moving towards decentralized identity tools by launching its first-ever token designed to certify verified user status on the platform.

Binance on Monday announced the launch of the Binance Account Bound (BAB) token, aiming to address identity issues in the decentralized society (DeSoc).

In contrast to traditional crypto assets like Bitcoin (BTC), the BAB token is introduced exclusively for online identification purposes and belongs to a type of Soulbound Tokens (SBT). Proposed by Ethereum creator Vitalik Buterin, SBTs are non-transferable, non-financialized tokens designed for DeSoc.

According to the announcement by Binance, the ​​BAB token is the first-ever SBT issued on the BNB Smart Chain. The token is aimed at many different use cases in the DeSoc but will initially only serve as Binance Know Your Customer (KYC) user credentials.

The BAB token will specifically be displayed on wallets to indicate the wallet’s owner has passed KYC verification on Binance. The token will function as a Binance identity and can be used by third-party protocols to verify BAB tokens for a variety of purposes, including avoiding bots, airdropping nonfungible tokens, voting and others, Binance said.

“As DeSoc use cases evolve, Binance may issue other types of BAB tokens in the future,” the announcement notes.

The BAB token is introduced as a pilot project and will only be accessible via the Binance mobile app, allowing KYCed Binance users to mint their BAB directly on their Binance wallets.

Binance CEO Changpeng Zhao pointed out that SBTs will play an important role in the way Web3 credentials will work in a DeSoc, stating:

“This will transform how we connect, as blockchain technology will give society greater authority to determine how communities interact based on their credentials or affiliations.”

Related: Major South Korean telecom company plans launch of blockchain wallet for crypto and NFTs

The CEO added that Binance will be collaborating with the community to work on new use cases for the BAB token in order to “develop this revolutionary vision of decentralized society.”

The new token is launched amid online reports claiming that the Binance crypto exchange has lost up to 90% of its customers and billions of dollars after adopting obligatory KYC verification in August 2021. Binance did not immediately respond to Cointelegraph’s request for comment.

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Know thy customer: The future of KYC in crypto

With the regulatory push for a tighter identification standards rises, the crypto industry definitely has some innovations to offer.

Crypto and Know Your Customer (KYC) guidelines seem to be an unhappy marriage — pseudonymity in the digital currencies’ DNA doesn’t match the old-school centralized protocols of traditional finance, but cohabitation is inevitable for the maturing industry. 

The tension never really goes away, but even before recent months’ market failures for crypto, the regulators have been clearly hogging the blanket, nudging the established platforms toward more strict authentication procedures and cutting the privacy-hardline players off the market.

Cardano co-founder Charles Hoskinson expressed a popular opinion from the industry side in the United States Congress when he told legislators that no regulators are doing a good job with KYC and Anti-Money Laundering (AML) safeguards at the moment. But, will the crypto community reach the point both technically and reputationally when it would get an opportunity for a more decentralized and more private KYC system?

From passport snaps to third-party databases

It is hard to imagine today, but KYC — while a standard for the traditional financial system for a few decades — has only recently become a default feature for the largest players in crypto. 

For example, Binance announced a more strict identification procedure for users only in 2021 after a series of legal controversies across the globe. Needless to say, there is still a myriad of smaller exchanges that are managing to evade the regulators’ attention and disregard the global call for tighter KYC.

But, things will hardly go as smoothly for those who prefer to exploit the grey zone, and it is not the overreaching officials and enforcers alone who threaten the existence of this segment.

The pressure is rising from individual and institutional newcomers alike. The former, while not necessarily being familiar with the ideological heritage of crypto, is ready to trade sovereignty for convenience on an established platform. The latter are hesitant to risk their funds by putting them in an underregulated market. Justin Newton, founder and CEO of Netki — a crypto-focused KYC company — explained to Cointelegraph:

“As crypto becomes mass market, it is likely that the vast majority of users will choose to use services that have at least some points of centralization. In the real world, most people value privacy and civil liberties, without being ultra libertarians. When given the choice between a reasonably regulated platform and potentially shady and opaque alternatives, most people will opt for the former.”

Speaking to Cointelegraph, Lisa Fridman, co-founder and president of Quadrata — a spin-off of Spring Labs focused on developing Web3 passports — characterized KYC’s underdevelopment in crypto as a growth problem: 

“There are a number of financial institutions with trillions of assets in aggregate which cannot engage in decentralized finance today because it lacks compliance-aware frameworks or ways to mitigate the possibility of commingling with ‘bad actors.’”

With all its acronymic mysteriousness, KYC in crypto works pretty simply. Generally, it includes an ID confirmation with the snap of a passport and basic data being compared against public and private records, as well as cross-checked with other data provided such as phone number or email address. A selfie with a handwritten note is also a common demand.

A more advanced approach includes, peculiar to lending or loan platforms, includes tracking a customer’s decentralized assets or credit status. Financial institutions will also typically check the potential customer’s name against appropriate sanctions and politically exposed persons (PEP) lists. Certain types of financial transactions could also require further steps, such as verification of accredited investor status.

As little KYC as possible is not a solution

The combination of high pressure from regulators and enforcers and the absence of uniform international standards contribute to the general stress around KYC in a swiftly maturing industry. 

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Metal Pay CEO Marshall Hayner told Cointelegraph that the crypto industry globally doesn’t come near the comprehensible standard for electronic data interchange between traditional financial institutions, such as ISO20022. Newton agrees with that, adding that the lack of clear standards and the freedom of interpretation often leads to malign cost-cutting by market players:

“Regulators provide guidance and guidelines, and companies interpret those guidelines for their own businesses. This leads to inconsistency across the industry and a somewhat natural effect of companies wanting to do as little KYC as possible to reduce costs as well as onboarding friction.”

This state of affairs couldn’t last long, given the industry’s ambition to merge with or even disrupt the traditional financial system and rise to scale by attracting institutional investors.

At first glance, the ball is on the side of the regulators, who are gradually moving to some kind of a holistic framework or at least several large ones — like the Markets in Crypto-Assets regulation in the European Union or a Lummis-Gillibrand “crypto bill” in the United States.

Though the move from the permissionless era of early crypto surely causes major anxiety among crypto evangelists, there is clear win-win potential. The irony of the situation, Fridman explained, is that not disclosing any data actually limits the range of potential use cases and the opportunity to be rewarded for establishing a strong reputation. Apart from an essential connection between a good and transparent credit story and the ability to use more capital-efficient solutions, some underestimate the all too real risks, she believes: 

“As the recent developments in the crypto markets indicated, a number of participants may be underestimating the risks involved. A constructive regulatory framework could help manage such risks.”

Verifiable credentials, ZKP and on-chain KYC 

The good news is that there’s no lack of innovative solutions the industry could offer to bridge the gap between regulatory demands and users’ desire for privacy. One of them is verifiable credentials — an open standard for digital credentials that use an easily verifiable digital signature. That signature matches the individual (holder), issuer and verifier in a kind of triangle, where the former doesn’t have to directly provide the sensitive data to each entity they interact with. This technology has already captured the attention of the medical sector that faced new challenges during the COVID-19 pandemic. 

Another promising concept is zero-knowledge proofs, a protocol through which a digital authentication processes can be facilitated without the use of any passwords or other sensitive data. There are examples of self-sovereign identity platforms that allow third-party personnel (for instance, law enforcement agencies) to determine whether an individual has a valid driver’s license without the person having to hand over anything other than their ID number. A use case more familiar to the crypto community is ZCash (ZEC), which employs a special iteration of zero-knowledge proofs that allow native transactions to remain fully encrypted while still being verified under the network’s consensus rules.

And, of course, there are a number of on-chain solutions for KYC. Quadrata aims to protect sensitive customer data and preserve the pseudonymity on-chain while also allowing a more compliance-aware crypto ecosystem to evolve. One can still have a pseudonymous identity that won’t be exposed to anyone without the proper credentials while tying the underlying real identity to the places that matter, believes Hayner, who’s working on decentralized identity (DeID) with Proton blockchain:

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“If I can’t see into your bank account why should I be able to see into your crypto account? We are working on compliant privacy this is coming to Proton blockchain, we see this as the future for crypto. Secure, private, compliant.”

At the end of the day, it is not only the KYC that should change the crypto industry but vice versa as well. Becoming more privacy and data ownership oriented, consumers drive the demand for options that allow end-users to be able to transact confidently, knowing their identifying data is not at risk. As Newton noted with a hint of optimism: 

“The limitation here is not going to be the technology, but instead the willingness of regulators to study and accept these new technologies.”

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Integrating blockchain-based digital IDs into daily life

Blockchain tech is pushing the boundaries of ID management as governments look for scalable solutions that promote privacy, control and decentralized data management.

The last 13 years have seen blockchain technology evolve into numerous use cases — finance, data, logistics and security, among others. However, the idea of using blockchain’s immutable capabilities to ID humans got new life when Changpeng “CZ” Zhao visited the island country of Palau to kick off its digital residency program. 

The blockchain identity management market is estimated to grow by $3.58 billion in the span of five years from 2021 to 2025. Key factors include the rising demand for digitalization and privacy-respecting identity solutions. As a result, a myriad of solutions breached the market serving this need in the form of nonfungible tokens (NFT), distributed ledger technology (DLT) and barebone blockchain technology.

Considering the plethora of use cases that blockchain can serve on a day-to-day basis, numerous government organizations began experimenting with the technology — weighing heavily on central bank digital currencies (CBDC) and verifiable and immutable user identity.

Problems with traditional IDs

Correctly identifying — or ID-ing — an individual has always been paramount to governments to ensure targeted delivery of services and allowances, among other requirements, which holds true to this day. However, ongoing advancements in technology empowered the general public with tools to create IDs visually identical to the original. Given blockchain’s capability to store immutable records, authorities see the technology as a fighting chance against fraud related to ID theft and fakes. 

With traditional paper-based IDs comes the difficulty of confirming their legitimacy across different systems. History has shown how people successfully use fake ID cards to claim unauthorized access to a myriad of benefits. However, technological advancements such as blockchain have provided authorities with the opportunity to issue verifiable certificates and IDs while ensuring scalability, speed and security of the identity management system.

Efforts on this front saw the rise of a new ecosystem comprising various blockchain-based digital ID offerings. For example, Shubham Gupta, an Indian Administrative Service (IAS) officer, recently spearheaded the launch of a Polygon-based system for issuing verifiable caste certificates on behalf of the government of Maharashtra.

Speaking to Cointelegraph, he said, “if identity management systems have to be rated on a scale of 0 to 1 based on decentralization and individual control, traditional centralized ID systems will be on the far left and fully self-hosted, public blockchain-based IDs on the extreme right.”

Forms of blockchain-based digital IDs

While blockchain technology can and has been used as-is for maintaining immutable records over the internet, innovations spanning over the last decade resulted in the birth of sub ecosystems around the use of blockchain technology. 

“The idea of blockchain-based digital IDs has been floating around for quite a while but came into the limelight with the recent NFT boom,” blockchain adviser and Bundlesbets.com CEO Brenda Gentry told Cointelegraph.

An Italian electronic identity document.

While NFTs were first marketed as a tool to represent real-world objects including intellectual and physical assets, the technology found itself well-suited for a variety of applications. Recently, government organizations have begun testing NFTs for ID-ing citizens as means to reduce operational costs.

“Wide-scale implementation of blockchain-based digital IDs — like issuance of national identity cards such as passports and driving licenses — takes time but I strongly believe that is the destination that the world should move toward,” Gentry added. In addition to helping authenticate people, blockchain technology discourages counterfeiting, tampering or identity theft attempts.

Citing the involvement of luxury brands and artists that promoted the use of NFTs to authenticate the legitimacy and ownership of a product or art, Gentry opined that “luxury items can be checked for their authenticity on-chain which completely eliminates the chance of owning a counterfeit product.”

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Neil Martis, the co-founder and project lead of LegitDoc, which is known in the space for delivering numerous blockchain-based certificates and ID solutions to the state governments of India, envisions a greater adoption of public blockchain-based ledgers over the next decade. Web3-native decentralized IDs will play an incremental role in identifying users and authenticating them to participate in different types of Web3 native transactions.

Benefits of blockchain-based digital IDs

While blockchain’s elevator pitch is heavily inclined toward immutability, the technology boasts multiple advantages over traditional software and paper-based systems. The opinions regarding the benefits of blockchain boil down to the control over personal information.

Self-sovereignty stands as one of the biggest benefits of blockchain-based digital IDs, according to Martis. This means that blockchain empowers users to share partial or selective information with their service providers instead of handing over their complete identity.

With blockchain-based IDs eradicating the misuse of information, experts envision the birth of a truly trustless system without the involvement of third parties. Gentry, too, reiterated verifiability, traceability and uniqueness as some of the major benefits brought about by blockchain, as she highlighted that blockchain IDs cannot be duplicated because it's on the distributed ledger. “All the Digital ID can be verified on the blockchain and can be traced back to the owners' account which can also be used for Know Your Customer,” she added.

Limitations of blockchain-based digital IDs

Mainstream acceptance of blockchain-based digital IDs will ultimately have to mean overcoming the most pressing challenges that threaten to hinder its adoption. Some of the roadblocks that stand out in the current landscape include a lack of education among the masses and a supportive regulatory environment.

On the education front, Gentry has noticed a fast-changing scenario brought about by mainstream discussions and widespread adoption of the technology. However, the creation of pro-crypto regulations will need greater intervention from industry players to help countries and institutions get onboarded onto the blockchain network.

Martis concurred with Gentry’s thoughts on regulations as he highlighted that blockchain IDs, no matter how decentralized, will need attestation or recognition by the issuing authorities. He added: “if the issuing authorities don’t recognize the validity of the blockchain IDs, then the same cannot be used for availing a majority of public services. This in my opinion is the biggest limitation.”

Blockchain of choice for ID-ing people

Given that a majority of real-world identity systems are under the purview of governments and sovereigns, Martis envisions greater adoption of permissioned distributed ledger networks for issuing Identities that require government services.

Gentry noted that choosing the perfect blockchain for IDing people or goods will require weighing the unique advantages and limitations of the various blockchain ecosystems. While highlighting the existing concerns such as Ethereum’s gas fees or Solana’s infamous outages, the blockchain advisor suggested that Binance’s BNB Chain is the perfect choice of blockchain because of its high transactions per second and low latency and fees.

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Speaking from personal experience, Gupta shared that Indian state governments tend to choose a middle ground wherein instead of a single authority fully in control of citizen identities, a group of independent departments will share a common distributed ledger that hosts citizen identities, anchored periodically on a public blockchain.

The Maharashtra government is currently working to deploy a scalable blockchain-based ID system for a tribal population of 1.2 million. Martis explains that the IDs created will be used by various departments to perform analytics and identify the right beneficiaries for various national schemes.

Regardless of the challenges that slow down blockchain adoption across business verticals, the advantages of the technology make its dominance inevitable. Government organizations and private entities have amped up efforts in uncovering futureproof fintech solutions via blockchain innovations. Blockchain disruptions that are well-positioned to go mainstream in addition to identity management include localized CBDCs, supply chain solutions and cross-border settlements.

Decentralized identities or DIDs (decentralized identifiers) have yet to see wide-scale implementation. According to Martis, they should be settled or issued by highly decentralized public blockchains that are outside state control, adding that “Bitcoin and Ethereum stand out as the obvious choices in this regard.” 

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Struggle for Web3’s soul: The future of blockchain-based identity

What’s behind Buterin’s embrace of “soulbound tokens”? Ensuring Ethereum’s dominance? A backlash against NFTs? Creating a better world?

The attention, one might suspect, has much to do with the participation of Buterin, blockchain’s wunderkind and the legendary co-founder of the Ethereum network. But it could also be a function of the paper’s ambition and scope, which includes asking questions like: What sort of society do we really want to live in? One that is finance-based or trust-based?

The authors illustrate how “non-transferable ‘soulbound’ tokens (SBTs) representing the commitments, credentials and affiliations of ‘Souls’ can encode the trust networks of the real economy to establish provenance and reputation.” These SBTs appear to be something like blockchain-based curricula vitae, or CVs, while “Souls” are basically people — or strictly speaking, individuals’ crypto wallets. However, Souls can also be institutions, like Columbia University or the Ethereum Foundation. The authors wrote:

There is no shortage of visionary scenarios about how Web3 might unfold, but one of the latest, “Decentralized Society: Finding Web3’s Soul” — a paper published in mid-May by E. Glen Weyl, Puja Ohlhaver and Vitalik Buterin — is close to becoming one of the top 50 most downloaded papers on the SSRN scholarly research platform.

“Imagine a world where most participants have Souls that store SBTs corresponding to a series of affiliations, memberships, and credentials. For example, a person might have a Soul that stores SBTs representing educational credentials, employment history, or hashes of their writings or works of art.”

“In their simplest form, these SBTs can be ‘self-certified,’” continue the authors, “similar to how we share information about ourselves in our CVs.” But this is just scratching the surface of possibilities:

“The true power of this mechanism emerges when SBTs held by one Soul can be issued — or attested — by other Souls, who are counterparties to these relationships. These counterparty Souls could be individuals, companies, or institutions. For example, the Ethereum Foundation could be a Soul that issues SBTs to Souls who attended a developer conference. A university could be a Soul that issues SBTs to graduates. A stadium could be a Soul that issues SBTs to longtime Dodgers fans.”

There’s a lot to digest in the 36-page paper, which sometimes seems a hodgepodge of disparate ideas and solutions ranging from recovering private keys to anarcho-capitalism. But it has received praise, even from critics, for describing a decentralized society that isn’t mainly focused on hyperfinancializaton but rather “encoding social relationships of trust.”

Fraser Edwards, co-founder and CEO of Cheqd — a network that supports self-sovereign identity (SSI) projects — criticized the paper on Twitter. Nonetheless, he told Cointelegraph:

“Vitalik standing up and saying NFTs [nonfungible tokens] are a bad idea for identity is a great thing. Also, the publicity for use cases like university degrees and certifications is fantastic, as SSI has been terrible at marketing itself.” 

Similarly, the paper’s attention to issues like loans being overcollateralized due to lack of usable credit ratings “is excellent,” he added.

Overall, the reaction from the crypto community, in particular, has been quite positive, co-author Weyl told Cointelegraph. Weyl, an economist with RadicalxChange, provided the core ideas for the paper, Ohlhaver did most of the writing, and Buterin edited the text and also wrote the cryptography section, he explained.

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According to Weyl, the only real sustained pushback against the paper came from the DID/VC (decentralized identifiers and verifiable credentials) community, a subset of the self-sovereign identity movement that has been working on blockchain-based, decentralized credentials for some years now, including ideas like peer-to-peer credentials.

A “lack of understanding”?

Still, the visionary work garnered some criticism from media outlets such as the Financial Times, which called it a “whimsical paper.” Some also worried that SBTs, given their potentially public, non-transferable qualities, could give rise to a Chinese-government-style “social credit system.” Others took shots at co-author Buterin personally, criticizing his “lack of understanding of the real world.”

Crypto skeptic and author David Gerard went even further, declaring, “Even if any of this could actually work, it’d be the worst idea ever. What Buterin wants to implement here is a binding permanent record on all people, on the blockchain.”

Others noted that many of the projected SBT use cases — such as establishing provenance, unlocking lending markets through reputation, measuring decentralization or enabling decentralized key management — are already being done in different areas today. SBTs are “potentially useful,” said Edwards, “but I have yet to see a use case where they beat existing technologies.”

Cointelegraph asked Kim Hamilton Duffy, who was interviewed two years ago for a story on decentralized digital credentials, about some of the use cases proposed in the “Soul” paper. How do they compare, if at all, with the work she has been doing around digital credentials?

“It is similar to my thinking and approach when I first started exploring blockchain-anchored identity claims with Blockcerts,” Duffy, now director of identity and standards at the Centre Consortium, told Cointelegraph. “The risks and, correspondingly, initial use cases I carved out — restricting to identity claims you’re comfortable being publicly available forever — were therefore similar.”

While the Soul paper touches on potential approaches to risks and challenges — such as how to handle sensitive data, how to address challenges with key and account recovery, etc. — “These solutions are harder than they may initially appear. What I found was that these problems required better primitives: VCs and DIDs.”

Weyl, for his part, said there was no intent to claim priority with regard to the proposed use cases; rather, it was merely to show the power of such technologies. That is, the paper is less a manifesto and more a research agenda. He and his colleagues are happy to pass credit around where credit is due. “The VC community has an important role to play,” as do other technologies, he told Cointelegraph.

A question of trustworthiness

But implementation may not be so simple. Asked to comment on the practicality of an enterprise like “soulbound tokens,” Joshua Ellul, associate professor and director of the Centre for Distributed Ledger Technologies at the University of Malta, told Cointelegraph: “The main issues are not technological but, like many aspects in this domain, issues of trust.” 

As soon as any input is required from the outside world — e.g., an academic degree, affiliation or attestation — a question arises as to the trustworthiness of that input. “We can raise the levels of trustworthiness of data through decentralized oracles, yet we should acknowledge that that data is still dependent on the collective trustworthiness of those oracles,” Ellul said.

Assume a university is a “Soul” that issues students blockchain-based certificates. “People may trust the attestation because they trust the centralized university that makes its public key public,” Ellul said. But then others might ask, “What is the point of storing SBTs on a DLT when the university keeps such control?”

Or looking at the idea of peer-to-peer work credentials, “In the real world, would a company honor a peer-to-peer credential issued by an individual or institution unknown to the company? Or would they rather just rely on traditional credentials?”

It’s a matter of “shifting the mentality of trust” from centralized institutional trust to trusting networks, Ellul told Cointelegraph — and that could take some time to achieve.

As soon as any input is required from the outside world — e.g., an academic degree, affiliation or attestation — a question arises as to the trustworthiness of that input. “We can raise the levels of trustworthiness of data through decentralized oracles, yet we should acknowledge that that data is still dependent on the collective trustworthiness of those oracles,” Ellul said.

Assume a university is a “Soul” that issues students blockchain-based certificates. “People may trust the attestation because they trust the centralized university that makes its public key public,” Ellul said. But then others might ask, “What is the point of storing SBTs on a DLT when the university keeps such control?”

Or looking at the idea of peer-to-peer work credentials, “In the real world, would a company honor a peer-to-peer credential issued by an individual or institution unknown to the company? Or would they rather just rely on traditional credentials?”

It’s a matter of “shifting the mentality of trust” from centralized institutional trust to trusting networks, Ellul told Cointelegraph — and that could take some time to achieve.

What if you lose your private key?

The paper presents several use cases in areas where very little work has been done until now, Weyl told Cointelegraph. One is community recovery of private keys. The paper asks the question of what happens if one loses their Soul — i.e., if they lose their private key. The authors present a recovery method that relies on a person’s trusted relationships — that is, a community recovery model.

With such a model, “recovering a Soul’s private keys would require a member from a qualified majority of a (random subset of) Soul’s communities to consent.” These consenting communities could be issuers of certificates (e.g., universities), recently attended offline events, the last 20 people you took a picture with, or DAOs you participate in, among others, according to the paper.

Community recovery model for Soul recovery. Source: “Decentralized Society: Finding Web3’s Soul”

The paper also discusses new ways to think about property. According to the authors, “The future of property innovation is unlikely to build on wholly transferable private property.” Instead, they discuss decomposing property rights, like permissioning access to privately or publicly controlled resources such as homes, cars, museums or parks. 

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SBTs could grant access rights to a park or even a private backyard that are conditional and nontransferable. For example, I may trust you to enter my backyard and use it recreationally, but “that does not imply that I trust you to sub-license that permission to someone else,” notes the paper. Such a condition can be easily coded into an SBT but not an NFT, which is transferable by its very nature.

Backlash against NFTs?

Inevitably, speculation is settling on Buterin’s motivation for attaching his name and prestige to such a paper. Some media outlets suggested the Ethereum founder was overreaching or looking for the next big thing to spur a market rally, but “This doesn’t fit Vitalik’s typical approach,” noted Edwards.

Buterin’s motivation may be as simple as looking for another way to maintain and build Ethereum’s platform dominance. Or, perhaps more likely, the impetus “could be a backlash against the speculation and fraud with NFTs and looking to repurpose them into a technology that changes the world in a positive way,” Edwards told Cointelegraph.

In any event, the Soul paper shedding light on decentralized society, or DeSoc, performs a positive service in the view of Edwards and others, even if SBTs themselves eventually prove to be nonstarters. In the real world, one often doesn’t need an all-encompassing, perfect solution, just an improvement over what already exists, which today is centralized control of one’s data and online identity. Or, as the paper’s authors write:

“DeSoc does not need to be perfect to pass the test of being acceptably non-dystopian; to be a paradigm worth exploring it merely needs to be better than the available alternatives.”

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