The coronavirus has accelerated a move toward a public option for digital wallets that would tie government authentication to payment transactions. If successful, this could be the catalyst for a national digital identity system.
“The whole notion of a central bank digital currency and digital ID are linked,” said David Treat, senior managing director and global blockchain lead at Accenture, which is participating as part of a non-profit organization to work with different stakeholders on central bank digital currencies. The group has worked with central bank digital currency projects for the European Central Bank, the Bank of Canada and Sweden’s Riksbank.
The difference between a CBDC and tokenized bank money is portability. The digital dollars can be transferred similarly to a text message, and would fully integrate with the existing financial system.
Central bank digital currencies, which would require a publically available digital wallet to receive, store and send funds, initially picked up steam as a response to Facebook's Libra cryptocurrency project. The coronavirus crisis, which is prompting relief in the form of government payouts to individuals and grants to businesses, has pushed the digital dollar concept further, since more government moves will likely be necessary.
Digital ID is part of these projects. In France, which this week accelerated its digital euro program, the call for applications details controls and supervision measures, as well as data to manage program participants.
In the U.S., the digital dollar was dropped from the most recent stimulus package, though there are still several proposed bills in Congress from Rep. Maxine Waters (D, Calif) and Sen. Sherrod Brown (D-Ohio).
It's likely that digital dollars, a central bank digital currency or a government-supported digital wallet will resurface in future coronavirus recovery bills as businesses attempt to reopen and consumers try to reenter the economy.
“Right now it’s just the beginning and there are more pressing problems to solve, but it’s something that will come back as the virus wanes a bit,” said Carlos Domingo, founder and CEO of Securitize, a tokenization platform.
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As a security measure, many people want to eliminate the use of passwords, which are generally not usable across multiple environments, such as using credentials from a mobile banking app or for entry into a public building or workplace. There are hundreds of digital ID projects underway that attempt to fix that by using distributed ledgers, cloud hosting or other technology to decentralize authentication. That would create a digital identity that works more like a driver's license.
“To produce this digital dollar system, a central bank will want a way to ensure the financial crime risk is limited and a digital ID system would allow that,” said Simon Taylor, head of ventures for 11:FS.
Several factors have held back progress for digital ID. The integrations between industries involves coordination among myriad parties on technology standards, for example. As such, companies have to cede some proprietary control to decentralize functions such as ID. And government-backed digital ID programs have advanced faster in countries with smaller financial networks, such as Canada.
A Fed-backed digital wallet wouldn’t get rid of these complexities by itself, but it would create a substantial base of users that would have a government ID that was usable for other public and private services.
“If you have a CBDC, you also need a wallet into which the digital tokens are put, along with credentials,” Treat said, adding there’s a wider ability to share those credentials with an employer, or in a health care setting, with the user in control of what part of that ID gets shared with whom. “These digital wallets store and hold these tokens, which is an important part of the innovation. As a second wave of innovation, this technology creates a more efficient way to identify people for other purposes from the wallet.”
There are some challenges to a federal digital ID, including privacy concerns.
“Places like India and China have introduced massive centralised biometric based identity systems, which make service provision much easier for the citizen but have questionable privacy implications," said Taylor. “Or we see a Scandinavian model where the banks themselves run the ID system.”
