Broad adoption of digital identity by Americans could be the step needed for the U.S. to become the “crypto capital of the world,” as envisioned by President Donald Trump. A new report from the White House’s Working Group on Digital Asset Markets on “Strengthening American Leadership in Digital Financial Technology” lists “digital identity providers” among the “key infrastructure providers and tools” that are “integral” to the cryptocurrency project.
The report calls on Congress to pass more legislation to grant the CFTC more regulatory power over crypto, and to promote decentralized finance (DeFi) technology. The SEC and CFTC should set up regulatory sandboxes and utilize safe harbor provisions to get “innovative financial products” into the market. The Working Group contrasts the actions of the current administration to “Operation Choke Point 2.0,” which is an alleged campaign by the Biden Administration to “debank” the cryptocurrency industry.
The Administration suggests that dollar-backed stablecoins will modernize the U.S. payments infrastructure, and calls on Congress to codify its Executive Order banning Central Bank Digital Currencies.
A chapter on countering illicit finance notes the potential for cybercriminals to use digital assets to fund their activities, and the importance of AML and counter-terrorism financing (CFT) measures.
But money laundering and terrorism financing are not major problems for crypto, according to the report, which cites estimates from two crypto analysis companies that only 0.61 percent to 0.86 percent of onchain digital asset volumes in 2023, or $46.1 billion to $58.7 billion, were illicit.
The Financial Crimes Enforcement Network (FinCEN) is withdrawing notices of proposed rulemaking related to unhosted digital wallets and travel and recordkeeping rules, and the Department of Justice has disbanded its National Cryptocurrency Enforcement Team.
Private sector investigations and the public-private Illicit Virtual Asset Notification (IVAN) system would take prominent roles in preventing illicit flows of money. Digital identities protected by MFA can help keep crypto assets out of the hands of North Koreans and other malicious actors.
This view contrasts somewhat with European Union’s Anti-Money Laundering Authority (AMLA), launched in July. The AMLA declared at launch that crypto-asset service providers “are exposed to significant money laundering and terrorist financing (ML/TF) risks due to their technological features, cross-border operations, and anonymity-enhancing capabilities.”
The report notes that the Financial Action Task Force (FATF) has flagged the lack of harmony in AML and CFT frameworks, warning of an uneven playing field.
National digital identity strategy pending
The chapter on illicit finance also includes a section on “advancing privacy through digital identity and related tools.” This passage acknowledges the capability of digital IDs to support identity verification and prevent fraud while safeguarding user’s privacy. Zero Knowledge Proofs (ZKPs) and selective disclosure are among the mechanisms explicitly identified as filling these dual priorities.
Socure’s Jordan Burris discussed America’s need for a federal digital identity strategy on a recent episode of The Federal Drive with Terry Gerton. Burris identified mobile driver’s licenses (mDLs) as “part of the equation,” but not necessarily the whole answer.
He also suggested that a June Executive Order rolling back support for mDL programs “cleans the slate such that a strategy can be put in place.”
The report advises the Treasury Department to look for “possible applications” of NIST’s updated Digital Identity Guidelines, and take lessons from the National Cybersecurity Center of Excellence’s (NCCoE’s) initiative to “Accelerate Adoption of Digital Identities on Mobile Devices.”
Though mDLs are not referred to by name in the document, those are both the main focus of the NCCoE project and the main digital ID credential owned by Americans so far. David Kelts, head of the STA’s mDL JumpStart Committee, noted in a recent Dock Labs podcast that there have now been 5 million mDLs issued in the U.S.
Treasury should also issue a request for information (RFI), as required by the GENIUS Act, to learn about innovations that could help detect money laundering and other illegal transactions, and improve digital identity verification.
Article Topics
cryptocurrency | digital identity | digital wallets | mDL (mobile driver’s license) | NCCoE | NIST Cybersecurity Framework | United States