How Digital Identity is Making Blockchain More Accessible for Enterprises

In the last week of April, as the price of Bitcoin was trading sideways, Ethereum received a welcome boost after news emerged that the European Investment Bank had issued its first-ever bond on the platform. The lending arm of the European Union, the EIB has minted bond-backed Ethereum tokens worth €100 million, due to mature in April 2023.

No doubt, the bullish price action stems from the excitement around an endorsement of Ethereum from a major financial institution like the EIB. But does it point to a potential broader acceptance of public blockchains from financial institutions? Possibly, but significant barriers remain.

It’s worth noting that Ethereum has been around for nearly six years now, and so far, its most extensive use case has proven to be DeFi. At least until now, large-scale enterprise adoption has eluded the platform. It’s easy to jump to the assumption that this is because Ethereum isn’t scalable or that transaction fees are high and often unpredictable.

But the main issue, particularly for financial institutions, is more fundamental. Ethereum and other public blockchains don’t have any built-in mechanisms for conducting compliance checks.

In the case of the EIB’s bond, the sales will be managed by investment banks including Goldman Sachs, Banco Santander, and Société Générale. These banks will need to conduct off-chain KYC checks before the tokens can be sold.

Therefore, there’s a separation between Ethereum’s functionality and what the banks need to achieve in order to remain compliant in the real world. Ultimately, this creates a disconnect that will be down to the banks to manage.

The Digital Identity Gap

It’s this kind of clunky gap in client and user experience that has so far limited the extent to which enterprises are willing to adopt public blockchains. The gap can be summed up in two words – digital identity.

There are signs that things are starting to change, though. For a long time, enterprises have looked to permissioned networks such as R3’s Corda to fulfill their blockchain use cases.

Although by definition, everyone needs permission to join Corda, R3 has nevertheless prioritized digital identity. According to an interview with R3’s digital identity lead, putting digital identity on the blockchain offers significant benefits because the existing processes for managing KYC and AML are siloed across multiple platforms, making it cumbersome to manage. And, of course, the penalties for getting it wrong are severe.

But in the area of public blockchains, there are also positive signs of progress in solving the digital identity challenge. One of the most promising new entrants to the enterprise blockchain market, Concordium, offers a hybrid on- and off-chain digital identity solution that would make it seamless for enterprises to transact with any party.

Zero-Knowledge Proofs for Private and Compliant Transactions

Concordium’s platform uses zero-knowledge proofs (ZKPs) so that when a user creates an account, an off-chain identity provider verifies their documentation and uploads a ZKP to the blockchain.

Once their account is created, they can transact in private. If they wanted to engage in financial transactions requiring a KYC check, the institution can receive confirmation that the party is verified, but without them having to reveal their identity or personal details.

Effectively, it removes the burden of KYC from the institution entirely. Given that banks spend an average of $500 million each year on KYC and client due diligence, using a platform like Concordium could represent significant cost savings.

The project recently underwent successful fourth funding round, raising $36 million towards readying its mainnet for a June launch. The latest investment puts the value of Concordium at $1.5 billion. If that seems significant for a blockchain project, then it’s worth highlighting that Concordium boasts some impressive academic and industrial heavyweights on its team.

CEO Lone Fønss Schrøder brings board-level experience from Volvo, IKEA, and Moller-Maersk. Project founder Lars Seier Christensen founded Denmark’s Saxo Bank, and the research arm of Concordium is based out of Aarhus University. The academic team is led by Professor Ivan Damgård, co-inventor of the Merkle-Damgård cryptographic construction on which many blockchains are based.

Social Proof of Identity

Concordium isn’t the only project pushing the digital identity agenda. Stratis is an enterprise development platform offering solutions for native C# and .NET blockchain applications, opening up the sector to developers who want to use common programming languages and frameworks. Rather than financial institutions, Stratis’ identity solution targets enterprises that need to verify someone’s identity for verification purposes, such as a job interview, or it also allows businesses to share their credentials with someone wanting to fund their new venture, e.g., in a crowdfunding context.

Stratis uses established credentials via online platforms such as Facebook, Google, or LinkedIn to create proof stored securely on the blockchain. In a similar way to Concordium, Stratis users can choose with whom they wish to share their digital identity. They can also easily see their credentials via the platform’s identity app.

So while it seems unlikely that the EIB move will precipitate a wave of enterprise Ethereum adoption, it does seem likely that the digital identity solutions already being developed will provide a more desirable outcome for companies.

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