Block, Circle, Coinbase Create Decentralized Identity Solution for KYC Blockchain Transactions – Ledger Insights
Today, Center, the consortium founded by Coinbase and stablecoin company Circle, announced Verite, a decentralized identity solution for use in cryptocurrency payments and decentralized finance jointly developed with Block (formerly Square).
For decentralized applications on public blockchains, KYC processes are impractical. However, if an organization like Coinbase verifies your identity, you can store those credentials in your wallet.
You can choose to share the fact that this wallet has gone through a KYC process with a DeFi application, such as a lending protocol. In theory, you can share KYC verifiable credentials while choosing not to list your name on the loan protocol. If the government wants to verify that you are not a money launderer, they can ask Coinbase for your identity. The big question is whether regulators will be happy with this approach.
“With Verite, users can obtain portable credentials similar to a ‘verified status’ badge that they can use across chains and protocols to prove claims about their identity,” said Kim Hamilton Duffy, Director of Identity and Standards at the Centre. “DeFi protocol developers benefit from identity-verified participants, without having to collect or store sensitive user information.”
One of Verite’s stated goals is that “law enforcement can have a clearer path to identify financial crime without hampering innovation and growth.”
Continuing with the example, an asset manager can verify that you are an accredited investor or reside in a whitelisted country. Some investments are restricted to accredited investors, and if the asset is tokenized, the associated smart contract may verify your credentials to confirm that you are eligible. Depending on the asset, you can choose not to share your identity. But for many real-world assets, the law requires a centralized registry of owners. Either way, this paves the way for institutional DeFi.
One of the issues currently facing the non-fungible token (NFT) industry is the prevalence of counterfeits. Theoretically, artists could go through an accreditation process. However, there should be a way to not only prove their identity, but to verify that they are the original artistic creator or musician. Once the music or art is tied to the identity, the royalties go to them, and them alone.
When it comes to financial inclusion, not everyone has a passport or national identity. Various refugee centers have their own ID systems, and these could also participate.
Meanwhile, Verite says it has “commitments to collaborate” on its open source solution from Algorand, Coinbase, Compound Labs, ConsenSys, Espresso Systems, Hedera Hashgraph, Ledger, MetaMask Institutional, Phantom Technologies, Solana Foundation, Spruce, and Stellar Development. Foundation.
Verite’s identity model is based on W3C standards and does not require the use of blockchain.
Will it protect privacy?
One of the main benefits of decentralized identity – or self-sovereign identity – is avoiding the large, hackable data silos in today’s credit reporting agencies and other centralized repositories. Another is to reduce reliance on big tech. And so that your personal data is protected.
But Verite’s main motivation is to prevent regulators from constraining decentralized applications.
It is therefore important to recognize the limits. Some entities, like Coinbase, will issue far more credentials than others. They already have your data in a silo.
Also, due to the transparency of blockchains, it is possible that they can link all your transactions to your name and address. And it’s not just your transactions in Coinbase or using the Coinbase wallet. However, they can already do so to a large extent.
We know of non-web3 companies that are looking at blockchain to track shopping habits, both online and offline, to allow brands to have a more consistent view of their customers’ behavior across all channels. buying channels.
So, while decentralized identity has many benefits, blockchain transparency provides both privacy benefit and cost.
Shared KYC is increasingly seen as desirable by banks for similar reasons to crypto – reduced friction. Blockchain-based solutions have been deployed in the United Arab Emirates and are currently being tested in Sri Lanka.