Custodians: the improbable catalysts of the token revolution?

Definition 1. “Digital identity” means more than one thing (e.g. self-sovereign Decentralised Identifiers (DIDs), verified credentials issued by banks to customers, complete data sets controlled by individuals, complete data sets about individuals maintained by third party specialists, government issued IDs etc.). Is a definition of “digital identity” – or the components of “digital identity” – necessary? Uses 1. The obvious use-case for digital identity in custody is customer on-boarding, which currently involves multiple document exchanges, multiple parties, duplication and repetition of processes, different processes for different businesses and asset classes, and often takes months. Are custodians persuaded digital identities are the key to a more efficient process? 2. Legal Entity Identifiers (LEIs), originally conceived to identify counterparts in traditional markets, are being used to identify issuers in digital asset markets. How does it help digital asset custodians to verify issuers (e.g., identifying a client customer at onboarding, reducing the risk of fraud etc.)? 3. We now have a Digital Token Identifier (DTI) comparable with the International Securities Identification Number (ISIN) in traditional markets. How useful is it to digital asset custodians in identifying assets? Value 1. How big a risk (e.g., financial loss, money laundering, fraud, regulatory fines, data breaches) do custodians take if identities (e.g., at onboarding) are mismanaged? 2. Assembling an identity (whether digital or not) is a (still largely manual) data gathering exercise. How hard would it be to automate the process (e.g. via APIs)? Obstacles 1. Is the compliance function within a regulated financial institution a friend or foe of digital identities? 2. Is the compliance function within regulated financial institutions too fragmented (i.e., divided between account opening, credit risk, legal, tax, cyber-security etc.) to support digital identities? 3. Investors and asset managers want to own and control their own data, and that of their customers. How does that complicate provision of digital identities? 4. Digital asset custodians are reluctant to rely on identities verified by other entities or identity verification credentials issued by other entities (i.e., do digital asset custodians insist on duplicating verification checks). Is that reluctance justified? 5. Is there a risk that digital identity might be captured by a single commercial entity rather than becoming an open public protocol? 6. The current customer identification process represents good business for data vendors. Won’t they oppose any moves to replace data checks with digital identities? 7. Who is most to blame for lack of progress on digital IDs – lack of investment by banks, lack of engagement by investors, vested interests of data vendors, unwillingness of data vendors to assume liability, surfeit of regulatory obligations, slow response of government tax and other offices, lack of official direction or something else? Making it happen 1. Why have industry utilities (e.g., SWIFT KYC Registry, e-KYC Singapore) and/or technology vendors (e.g., Clariant, Onfido) not solved the identity verification problem? 2. Is obliging companies and individuals to take ownership of their identification data, and assume responsibility for keeping it up to date, as with MyInfo in Singapore, not a solution? 3. What contribution can governments make (e.g., a national verified identity, setting credential standards and digital identity frameworks to govern issuance, stabilising and harmonising diverse national rules on money laundering etc.)? 4. Does blockchain technology have any role to play in digital identities? 5. What prevents the industry agreeing digital identity standards and best practices and sharing – even mutualising in a separate entity – standardised information? 6. How long might it take to secure industry-wide adoption of digital identities – and what factors are needed to drive it? 7. Does retail business offer any useful lessons? For example: In the United Kingdom, Select ID runs a marketplace allowing banks to offer customers a choice of digital ID providers, giving customers control of their data. The EU has had an eIDAS digital identity framework since 2014 and a Digital Identity Wallet (EUDI Wallet) for citizens, which will contain legal credentials issued by national governments, is being launched on the back of it. Will this help custodians? In India, the central securities depositories (NSDL and CSDL) make use of a verified national identity (Aadhaar) to on-board retail investors Closing question 1. The direct costs and opportunity costs of inefficient identity verification run into tens of billions of dollars. If issuers and investors can be identified more easily and efficiently, and so saving money, what contribution will that make to the growth of the digital asset markets versus the traditional financial markets?