Self-Sovereign Decentralized Identity Is Key To Retail CBDC Adoption

In the last few years, a conversation has arisen surrounding the implementation of what is known as Central Bank Digital Currencies, or CBDCs. CBDCs would act as modern forms of money that are digitally native and built on technologies such as blockchain. They take the basic philosophy of cryptocurrency but modify it for use by a central bank. With more and more jurisdictions looking to implement such a system, many are beginning to discuss the challenges and requirements needed to make a state-sponsored virtual asset usable and successful.

Alongside adoption, hurdles include the need for a digital currency to maintain personal privacy for individual users. Because blockchains act as immutable, permanent ledgers of all transaction activity, there is a real risk of personal history being collected and used in unsavory ways. Users would be more exposed than ever to data harvesting and the risks of government surveillance.

However, banks and regulators can’t allow for fully anonymous transactions either. If there is no way to monitor or influence financial activity, then the asset would attract money laundering and criminal financing. This is unacceptable to governments, and hence, some form of individual accountability is required.

This inherent duality of needs for implementing a CBDC is, fortunately, not unresolvable. If such an asset was implemented in conjunction with a properly designed digital identity, then a functional middle ground can be reached that enables privacy but works with the existing compliance and financial networks.

IDs Designed to Work With CBDCs

Not just any type of ID is sufficient here, but instead, one that answers to the privacy and accountability concerns that digital currencies come with. What’s needed is a Self-Sovereign decentralized identity, or SSDID, powered by blockchain and smart contracts. The potential benefits and utilities that such a system provides for the release and management of a CBDC are many.

For starters, SSDIDs are digitally native, just like CBDCs, and can be built directly onto the same networks for complete interoperability. They can act as a profile, wallet, and credentials for access all at the same time. Anyone could use their SSDID as a frictionless means of payment both online and at physical retailers, instantly transferring funds at the time of purchase. Transactions would also be much more trustworthy, as it would be near impossible to forge, obscure, or alter payment info in any way. This stands to massively upgrade how a user accesses their money and interacts with services, but there’s more.

SSDIDs can also address the issue of individual privacy. This is because they act as an asset on the blockchain themselves and are secured using a private key, which only the user owns. This means all of their personal information, their transaction history, and anything else they want to keep private will be under their full control. No third party could directly correlate a set of transactions with an actual individual, only an alias, avatar, or digital persona. Compare this to current models that utilize subscriptions and require users to store their info on centralized third-party servers.

SSDIDs Help Enforce Regulations Without Unnecessary Oversight

It may sound like this could be an issue for bringing accountability to the space, but this doesn’t need to be true. These SSDIDs can be set up utilizing pre-existing credentials and biometrics linked to the individual. Not only would this mean that only the actual owner of the ID could access their account or information, but it also would prevent things like multiple accounts from one individual or account impersonation. This could, for example, fulfil the FATF’s “Travel Rule,” requiring both parties in a cross-border transaction to confirm their identity. Using SSDIDs, both parties could be confirmed as verified users without any outside entity needing to know who they actually are.

What’s more, this system can work without excessive surveillance needed to enforce regulations. CBDCs and SSDIDs could be coded to only allow legal transactions in any jurisdiction. Instead of monitoring illicit activity and doling out punishment, this system would inherently make it impossible to perform most crimes in the first place. A broad set of open standards could be baked into these IDs, with nuance allowed for varying regulatory environments. This stands to be a much more efficient and forgiving methodology for maintaining financial compliance.

Ultimately, the potential benefits of implementing standardized SSDIDs are too many to ignore for implementing a CBDC. Government leaders and lawmakers should look closely at the technology available to bring about a standardized currency that helps to bring the economy into the 21st century but also brings greater control and equity to the citizens who use it. Doing so paves the way for a safer and more functional global economy.