Digital Identity on the Blockchain is an idea whose time has come. Two things are happening at the same time. One is the realisation by millions of people that our digital identity data is at least as valuable as our money. The second is that thanks to Blockchain we have all been given the tools to control assets that we own.

This is Part 1/chapter 15 in The Blockchain Economy book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index please go here.

During 2018 I gave a talk about Digital Cooperatives at an event near Geneva in France that was organised by ARK IO (a French crypto platform that we had earlier covered here).

This event focussed on two big trends that I have covered in earlier chapters:

– Jurisdictional competition.

– Digital Cooperatives.

The event came after the news that France was making some serious moves to become a major jurisdictional venue for cryptocurrency investors (see news here). I thought this was the story, but really France is one more jurisdiction positioning in this space that seems to have a new entrant daily. The surprise takeaway from the event for me was how Digital Identity is the key to the Blockchain Economy. This chapter focusses on:

Digital Identity on Blockchain 101

The Identity Middleware in the Blockchain platform stack

The Digital Identity Edge Cases that may drive change

Investor Identity replaces the broker rolodex in the ICO market

Our Identity is more important than our financial assets yet we give it all away

The Quantum Computing problem

Digital Identity on Blockchain 101

Digital Identity on Blockchain is driven by three concepts

1. Your Digital Identity is an asset that you control through a private key. You control Digital Identity on Blockchain just like you control cryptocurrencies on Blockchain.

2. Nobody can change that data. Not you, not your government, not some corporation. Data can be appended, but never deleted or changed. Think of this like a private key to your bitcoin that allows you to view your crypto stash but not to magically make the stash bigger. Your biggest asset is safely under your control, but you cannot simply write your own history of yourself.

3. Granular control. You can reveal one part to one company and only that one part. The only person who sees the whole picture is you. For example, only you can see your health records, friends, financial records, political opinions and all the intelligence you gather by combining those data sets.

The Identity Middle Layer in the Blockchain platform stack

All the above may sound good enough in theory, but how does it work in practice? The short answer today is – badly. This is like using email in 1992 – going to the post office or fax machine was easier.

The good news is that there are a lot of very smart people working on the problem and the prize is big and there is no scientific breakthrough needed. So we can be confident that this problem will be solved even if we don’t yet know by which company and in what timeframe.

The general outline of the solution is becoming clear and was visible at the Ark ecosystem conference. The solution will come (as it usually does in software) through a 3 level stack:

• Top: the User Experience (UX) app/service that consumers will use.

 

• Middle: Digital Identity as an API service for developers who are creating the User Experience (UX).

 

• Bottom: core enabling technology.

The reason that this is hard to see is that the Middle and Bottom are still being rolled out and no Top of stack UX services have made it super easy for consumers. The Crossing the Chasm model assumes is that these consumer UX services will first appear in edge cases, niches that most big vendors ignore (more on that in the next section).

The Ark Middle Layer part, which they call Persona, is clever in two ways:

• 1. ARK enable partners to do the onboarding and that partner can then offer Identity As A Service to other companies. This is like a digital version of the old bankers letter of reference (a letter from your bank that you take to another bank). The digital version has to be a lot more rigorous to comply with KYC laws.  The Persona model separates the technology from th e actual work of on boarding and relies on a big regulated entity being trusted by another big regulated entity, which is how the world works.

 

• 2. You only use Ark to store the data. You can still use Bitcoin, Ethereum or whatever other consensus platform you want.

The closest I have seen to this is what Consensys is doing with UPort on the Ethereum Blockchain.

The Digital Identity edge cases that may drive change

For years, anybody who talked about privacy was dismissed as a “privacy nut” and the refrain was that if you wanted privacy you must be doing something illegal. Four recent events indicate some change happening:

• the Equifax breach.

 

• the Facebook/Cambridge Analytica “breach”.

 

• the legislation in Europe around GDPR.

 

• Moves by governments with authoritarian tendencies to control that data.

However, to drive behavioural change, individuals must make Privacy an A List priority. Most people, even once they agree that privacy is important, don’t take action by doing something like using TOR or DuckDuckGo. To date, a lot of the people who did make it an A List priority were assumed to be doing it for terrible things such as terrorism or pedophelia.

There is another more grey area which is using Privacy for illegal activities that many people think should not be illegal. One example is buying drugs. Another grey area is Money Laundering; this i certainly illegal, but how you view it depends on how you view the legitimacy of your government. If your government is a corrupt dictator who steals private assets then you view Money Laundering as no different from protecting assets from thieves. Drugs and Money Laundering are legally clear cases, but more grey from a moral point of view. To give two extreme cases where we may cheer an illegal action:

• somebody buying cannabis to help a family member with cancer.

 

• A Jew getting assets out of Nazi Germany.

Then one moves into things that are not illegal but which you don’t want made public. Maybe you want to hide your porn use or your sexual preference or a mental illness.

Another edge case user is a techie who understands how data mining works. When you hear somebody who works at Google quietly describe how they use DuckDuckGo, you can see this happening.

People in these edge cases have the motivation to use the more privacy oriented services. They then talk to people in the mainstream and show them how easy it is. Those early adopters make money for the companies offering these services which they can invest in improving them. That is the normal way that technological change propagates to the mainstream.

Another way that technological change propagates to the mainstream is when there is a “bucket load” of money to be made – which is what we look at next.

Investor Identity replaces the broker rolodex in the ICO market

Picture ye olde broker “working the phones” from his/her rolodex. Now update that through 5 waves of change:

1. Rolodex is replaced by CRM.
2. Phone is augmented by email.
3. Email is augmented by social media.
4. Online conference augments physical meetings.
5. Broker is replaced by a wallet app.

The last one is being touted as the disruptive change. In that vision, the human broker is lumped in with other jobs that got automated out of existence (like drivers by autonomous vehicles).  I don’t buy that for two reasons:

• Digital Fatigue. The explosion of content is not matched by equal growth in attention. Supply exceeds demand. So we are more likely to pay attention to something new if it is brought to our attention by somebody we have a real relationship (ideally face to face but at least by phone).

 

• Wealthy people put up barriers. They have to, or they would be inundated. Few people are trusted through those barriers.

So I believe people will still call people on the telephone and have meals and drinks together. However those people will work within a system that will manage:

• Who you are allowed to sell to. For example, don’t try selling a Token to a non-accredited investor in America or any investor on a watch list for illegal activities. The baseline in all conversations with regulators is “you must be KYC compliant”.

 

• Who you have a real relationship with (for reasons described above).

 

• Who buys investments like this. For example don’t try selling an early stage Token to somebody with no tech experience who follows Warren Buffet investing rules.

Opportunity lies at the intersection of all three.

What we call a system like that is unclear. It is something like a CRM system, but with elements of data science and may look like a wallet or an exchange.

Our Identity is more important than our bank account yet we give it all away

It sounds rather wild to say that our Identity is more important than our bank account, but consider these cases:

• your Identity is stolen and thieves use this to steal your money.

 

• Something in your Identity means you are turned down for a job or a loan or a deal falls apart based on some data about you that came up in due dilegence..

There are three reasons why we give away such a valuable asset for free:

• 1. The money to be made by owning our data is massive. That means  the companies that control that data can hire  the best tech brains to make their services totally addictive. That is why companies such as Facebook are so valuable and why so many companies have tried so hard to control user data.

 

• 2. Privacy is like eating your veggies. We may know we should do it, but that ice cream does look more tempting.

 

• 3. The connection between Identity/Privacy and things we want (such as material abundance) are not clear in most people’s minds. This is still in the early adopter phase of the market.

Facebook understand this well. In January 2018 Facebook acquired a software firm called Confirm that specializes in authenticating government-issued identification cards (news report here). In traditional Acquire-hire terms, the three year old company will wind down its operations and its employees will join Facebook.

Facebook will wait until the Cambridge Analytica story moves off stage. Then they will present a PR story that the data is totally controlled by the user. Some maybe sceptical but the Facebook service will be super easy for mainstream users and so it will have a big impact on Digital Identity.

The UX needs to be as easy asDuckDuckGo.

Most of the people who use DuckDuckGo fall into those edge cases described above (and maybe called privacy nuts). DuckDuckGo is starting to break through to the mainstream because they made switching super easy. Anybody working at the UX layer of these services need to study DuckDuckGo.

The Quantum Computing problem

The dystopian world where our digital identity is controlled by a few corporations such as Facebook or by corrupt authorittarian governments, may drive us to Digital Identity on Blockchain services.

This leaves one big potential looming problem which is that advances in  Quantum Computing could make all current cryptography crackable. This is obviously a bigger problem than just Digital Identity but Digital Identity will be at the centre because any serious doubt about data security could slow adoption. As of now I have heard no convincing argument beyond “Quantum Computing is still bleeding edge and by the time it is proven, cryptography will be improved”. That leaves me hopeful but not convinced.

Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).