Today Centre, the consortium founded by Coinbase and stablecoin company Circle, announced Verite, a decentralized identity solution to be used for 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, then you could store that credential in your wallet.
You can choose to share the fact that this wallet has been through a KYC process with a DeFi application, like a lending protocol. In theory, you can share the KYC verifiable credential while choosing not to tell the lending protocol your name. If the government wants to check you’re not a money launderer, it can go and ask Coinbase for your identity. The big question is whether regulators will be happy with this approach.
“With Verite, users can get a portable credential similar to a ‘verified status’ badge that they can take across chains and protocols to prove claims about their identity,” said Kim Hamilton Duffy, director of identity and standards at Centre. “DeFi protocol developers get the benefit of identity-verified participants, without having to collect or store sensitive user information.”
One of Verite’s stated aims is that “Law enforcement can have a clearer path to identifying financial crime without hindering innovation and growth.”
Continuing the example, an asset manager might verify that you’re an accredited investor or reside in a whitelisted country. Some investments are restricted to qualified investors, and if the asset is tokenized, the associated smart contract can verify your credential to confirm you qualify. Depending on the asset, you might choose not to share your identity. But for many real world assets, legislation requires a centralized registry of owners. Either way, this paves the way for institutional DeFi.
One of the problems currently facing the non-fungible token (NFT) sector is the prevalence of fakes. Theoretically, artists could go through a credential process. However, there would have to be some way not just to prove their identity, but to verify that they are the original artistic creator or musician. Once the music or art is linked to the identity, the royalties go to them, and only them.
Turning to financial inclusion, not everyone has a passport or national identity. Various refugee centers have their own identity systems, and those potentially 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?
A key benefit of decentralized identity – or self-sovereign identity – is to avoid the big hackable data silos in current credit referencing agencies and other centralized repositories. Another is to reduce dependency on big tech. And for your personal data to be protected.
But the primary motivation of Verite is to keep regulators from constraining decentralized apps.
So it’s important to recognize limitations. Some entities, like Coinbase, will issue far more identity credentials than others. They already have your data in a silo.
Furthermore, because of the transparency of blockchains, there’s a possibility they can link all your transactions to your name and address. And that’s not just your transactions within Coinbase or using the Coinbase wallet. However, they can already do that to a significant extent.
We’re aware of non-web3 companies that are interested in blockchain to track shopping habits, both online and offline, to enable brands to have a more coherent view of their customer’s behavior across shopping channels.
So while decentralized identity has many advantages, the transparency of blockchain provides both a benefit and a privacy cost.
Shared KYC is increasingly seen as desirable by banks for similar reasons to crypto – a reduction of friction. Blockchain-based solutions have been deployed in the UAE and are being trialed in Sri Lanka.
