As our lives get increasingly intertwined with the digital world, creating a safe and ubiquitous digital identity becomes a necessity. While our physical identities are well-established and are generally government-issued, our “digital twins” can provide much needed flexibility in the virtual world. Currently, the digital credential management market is fragmented – our identities are connected to an individual company or institution, imposing the responsibility to remember countless usernames and passwords to ensure our digital identities remain only within our hands. Besides cumbersome friction that this system causes, it also possesses significant threats to safety and privacy, as a centralized system is vulnerable to breaches and deprives consumers of the ability to control their digital identities.
What the future can bring is a unified Personal Identity Ecosystem that allows consumers to engage with services of various organizations through a single front-end interface. This would eliminate the burden of managing multiple usernames and passwords and allow end-users to become the owners of their identity rather than companies and organizations being in charge of it. Personal Identity Ecosystem could encompass a variety of use cases, from healthcare to gaming. Yet the question arises how such a system can be efficiently developed and who should be responsible for building and managing it?
The potential Future of Digital Identity (source: Liminal, 2021)
The evolution of digital identity breaks down into centralized, federated and decentralized:
In a centralized system one organization has full control (e.g., governments, banks, social media platforms).
Federated - different stand-alone systems, each with its own trust anchor that established trust with each other (e.g., Sweden’s BankID).
Self-sovereign – managed in a decentralized manner and is the next step in the evolution of digital identities. Its strength lies in providing more user control over their identities which central and federated systems lack. Yet, such a system is still in its early stages of development and faces numerous challenges and risks before it can be adopted on a large scale.
The governance model of the decentralized identity system is yet to be decided. As the landscape is evolving and there are numerous players, namely, governments, bigtech, financial institutions, telcos, startups, answering who will be the custodians of digital identities is especially difficult. The table below provides an overview of how well four key parties are positioned in the digital identity market. It is by no means a definitive list but rather created to give a general view.
A good digital identity is about creating the most value for the user while also ensuring a high level of trust and safety. Attributes of a good digital identity can be seen in the picture below.
Figure 1: Features of a good digital identity (sources: BBVA, 2018; World Economic Forum, 2018; McKinsey, 2019)
What is extremely important to note is that privacy is key – if consumers do not feel that their data are protected, they will not transact online. According to Cisco Consumer Privacy Study (2021), 46% of users do not feel being able to effectively protect their data with 76% responding that the reason for this is just because it is too hard to figure out what companies are doing with their data. Cybercrime is on the rise - Zscaler reported a 700% YoY increase in IoT attacks on corporate networks since 2019, while the FBI saw a 70% increase in internet crime complaints between 2019 and 2020. And what is even more concerning is that nobody is protected from data breaches. Everyone, including governments, large corporations, individuals, and many more are consistently exposed to hacks, data breaches, and other kinds of cyberattacks.
Looking ahead, some of the key trends in the future development of digital identities are giving users more control through decentralized systems, more interoperability via identity ecosystems and, advancing identity proofing by evolving trust anchors. There are numerous challenges we currently face though. This includes optimizing user experience and adapting it to local habits, keeping regulations in line with fast-evolving technology, ensuring safety and efficiency, and high risk of market fragmentation, as many players enter the market with their solutions without an established regulatory environment. As we tackle those challenges, we need to make sure to grasp the opportunities that digital identity development can provide. Creating widespread value for individuals, establishing trustworthy means of data sharing, collaboration among public and private players, and traceability in supply chains are just a few of the opportunities that can make our future more efficient, and all thanks to well-established digital identities.
You can download our full report about digital identity here.
We at Alfvén & Didrikson, are very curious about the digital identity market and believe that it holds a lot of potential. Thus, we are looking for opportunities to invest in growth stage startups in this area based in Nordics, UK, and Baltics. If you are building something exciting in this market or know someone who does, we’re very excited to hear from you at ieva@alfvendidrikson.com.
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