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The Next Evolution Of Digital Identity In 2022

Forbes Technology Council

Co-Founder and CTO of Passbase, a privacy-focused identity verification tool. In 2020, he was featured on the Forbes 30 under 30 list.

With a market value of more than $3 trillion, history will note that 2021 was the year of crypto going mainstream. Yet, issues of fraud and identity theft have been pervasive on crypto platforms, with one of the most recent hacks resulting in the theft of $600 million. As demand for crypto and other online services continues to increase, companies will need to successfully address regulatory and security concerns.

Legislators have reacted to the pandemic-driven digital transformation of services with a wave of KYC requirements for crypto, mobility and online retail for age-restricted products, to name a few. Mounting compliance pressures and the need for companies to cultivate trust with their customers has led to a surge in the identity verification industry. In 2022, I believe companies handling online transactions will develop more sophisticated approaches to identity verification that go beyond regulatory KYC/AML requirements and become a cornerstone for business, product and customer service strategies.

DeFi and CeFi will continue to merge.

Since major markets like the EU have legislated KYC requirements for crypto, decentralized finance (DeFi) has become the center of attention. While DeFi made up 75% of crypto hacks this year, ConsenSys raising $200 million with HSBC as a lead investor is a vote of institutional finance's confidence. While online identity verification emerged as a solution for centralized finance (CeFi), future digital identity infrastructure will borrow from DeFi concepts. While DeFi and CeFi may differ in their opinions about privacy and anonymity, they both need to solve the issue of trust to facilitate transactions. Some DeFi services will borrow KYC best practices of institutional banks to craft user identification solutions. Likewise, CeFi can incorporate blockchain technology and distributed networks to validate claims.

In 2022, the technological innovations from DeFi will continue to create infrastructure for the future of finance as well as digital identities. Point-based identity verification solutions that served traditional financial and AML requirements will give way to digital-native verification solutions that solve both issues of user verification for access management and identity verification for KYC. Companies building digital identity infrastructure will likely take privacy preservation and trustless architecture concepts from DeFi to serve consumers more effectively.

New regulations will evolve into pragmatic implementations.

The new wave of KYC- and AML-related regulations across the globe can steer online industries into safer standardizations, but implementations remain a challenge. In the EU, the 6th AMLD added digital asset service providers to the list of obliged entities. The Infrastructure Investment and Jobs Act in the United States has come under scrutiny for its broad definition of broker and tax reporting requirements for crypto transactions that exceed $10,000. These new laws must be feasible for enforcement.

Moving forward, new regulatory burdens affect both companies and government agencies. The operational realities of legislation, such as the feasibility of legacy reporting requirements given the speed and volume of online transactions, will become apparent. I believe a new equilibrium will emerge that will make compliance manageable for both companies and enforcement alike.

However, businesses will likely move from reactive KYC programs to proactive regulatory strategies. In 2022, companies will not settle for KYC providers that check regulatory boxes. Instead, companies will choose identity verification partners that meet operational needs, such as quick setup and maintenance of multiple verification flows for shifting regulations, specific market legislations and automation requirements.

Interoperability will be the game-changer.

Prior years have seen fragmented solutions to handling identities online that range from password managers and government-issued e-identities to identity verification service providers for KYC and organizations working on self-sovereign identity (SSI). One of the main barriers to consumer adoption has been interoperability. Demand for digital identity and assets reached critical mass in 2021, with popular demand for digital Covid-19 vaccination certificates and passes. In 2022, these initiatives will continue to expand, spurred by government endorsements like the European Commission's announcement for a Digital Identity and consumer demand for convenience.

Companies that work with identity verification partners that provide digital identities to be used across multiple platforms will have a competitive edge with growing network effects. Moving from point-based solutions to interoperable digital identities will ultimately benefit both consumers and businesses that want to transact in a trustworthy way.

Commitment to consumer privacy is the fuel for future business.

Rampant harvesting and monetization of data have led 128 countries to enact legislation to protect user privacy. While using Facebook and Google single sign-on (SSO) to access services may provide a level of convenience, many of these options come at the cost of privacy. Companies in 2022 need to attract skeptical consumers. By giving consumers control over their data, letting them decide how, when and to whom they are giving information about themselves, companies will differentiate themselves in this new era of online services. While this is countercurrent to prior business wisdom of collecting data first, a commitment to privacy without compromising on user experience can become a unique selling point for companies in 2022.

Digital identity will unify teams to serve consumers more effectively.

Previously, companies have seen customers as fragmented pieces of information, allocating different parts to different departments. Compliance wants to collect KYC data points, while engineering teams focus on identity access management (IAM). Marketing may want to know a user’s demographics, while customer support may only see chat logs with a user. These information silos are alienating for customers and frustrating for teams trying to help them. Not having enough context about customers, especially to support them, is inefficient for operations and costly if it comes to issues such as account takeovers (ATOs) and fraud. By using a unified digital identity, various teams can give customers personalized experiences by consulting a single source of truth.

In 2022, I believe digital identity will continue to rapidly evolve as efficiency, interoperability and privacy take center stage. Together, digital businesses and identity verification providers can build an identity infrastructure where identity is an independent layer in the internet ecosystem that is free from incumbent gatekeepers that profit from private data.


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