In this interview with Ripple’s CTO David Schwartz for the Block Stars podcast, our CEO and Co-Founder, Julian Leitloff was invited to share his expert opinion on the growth of decentralized identity in the web3 space. Julian explored web3’s transition from its erstwhile compliance-heavy use cases to a crucial blockchain infrastructure component, shared insights on the importance of the “right to be forgotten” facilitated by decentralized identity, and also explained the role of leading identity solutions providers like Fractal ID.
With the principles of transparency, privacy, and reliability at their forefront, decentralized identity systems serve as the building blocks of an inclusive web3 ecosystem. Seamless portability, interoperability, data control, selective disclosure, and better user experience are just a few of the many benefits that decentralized identity brings. Integrated across blockchain ecosystems, decentralized identity solutions empower web3 projects to navigate the muddy waters of compliance and data regulation requirements to ultimately foster growth and innovation in the new digital landscape.
However, the widespread adoption of decentralized identity is still in its early stages. Obstacles, particularly related to regulatory policies, hinder its progress. As governments grapple with the implications of blockchain technologies, existing legal frameworks lag behind and struggle to accommodate new identity solutions.
With a lack of regulatory support for innovation, what does the future hold for decentralized identity? Is the time for streamlined adoption now?
Read the excerpts below to find out! The full podcast can be found here.
David: Could you tell us a bit about how you got into web3 and DID?
Julian: Quite some time ago, in 2017, a good friend of mine, Bruce Pon from Ocean Protocol introduced me to the space quite early. They were building what could arguably be one of the first NFTs back in the day on the Bitcoin stack. It took me a while to see the potential. So I wrapped up my first company, which my co-founder is still leading today, and started exploring the space in depth. Since I started my career in finance, looking at what web3 technology enables there and bringing its benefits to finance was something that resonated from the start.
David: I know DID is linked to compliance use cases. Things like users not wanting to interact with people and businesses that are sanctioned or having needs related to KYC/AML processes. What is Fractal ID’s use case for decentralized identity and how does it play into regulatory requirements like KYC, AML, and sanctions?
Julian: Those were the first use cases that we saw in web3 popping up. KYC is something that we’ve been talking about for the last seven years and it’s a pity that we haven’t gotten to a point where this is organized through decentralized identity. We have moved beyond proof of concepts and into actual operational usage. This is something that is going to change in the very near future. We see quite a bit of movement in terms of bringing decentralized identity on-chain. Talking specifically about the application of the DIDs for compliance, there is still some way to go if we consider concerns like data privacy. We need to make sure that DIDs are available, interoperable, and also discoverable. Right now, there are so many ways in which people understand the concept of decentralized identity — think Soulbound tokens, NFTs, and registries. Some also employ web2 APIs and call it decentralized identity. What Fractal ID is trying to do is to bridge all of that. We are not necessarily only focused on KYC, but on identity as a whole — to handle all identity requirements from creation to management while also making sure that users are unique human beings and have certain characteristics.
David: Let’s talk a little bit about regional differences. I’m based in the United States and the regulatory environment here is not as supportive of innovation and development of new technologies. You are based in Berlin. Please tell us about the crypto climate and the web3 landscape there. What do the regulations look like and how does that impact adoption?
Julian: It was not a coincidence that the Ethereum network was started in Berlin. The web3 ecosystem in Berlin is pretty diverse and focused on the core values of decentralization. What I really like here is that there is no concept of a regional ecosystem. It’s an ecosystem made for collaboration and this might even have political and historical reasons where Berlin was an enclave back in the days when actual cryptography was super important. I also think that the ecosystem is better in terms of policies, when it comes to innovators having the opportunity to experiment with new things and the regulations have been quite nuanced so far. However, there are some specific use cases that are not so great here. So for example, Fractal ID does not offer identification services for Java companies because of very specific regulations. So we serve everyone in the world but Germany which is kind of sad, but it is the way it is.
David: Are there developers right now who have problems that identity can solve? With the drag on institutional adoption, is now the time for decentralized ID solutions?
Julian: If you look at the fintech world, you will see customer acquisition costs skyrocketing, because people need to re-do KYC all the time. In the case of user data ownership, we’re looking at big monopolies that differentiate themselves just by being the bottleneck for confirming human liveliness, and out of these walled gardens, everything is wild and rampant, and scammy. So I think decentralized identity solutions there are more needed than ever. We need to go ahead and test some things and present finished systems to regulators but also explore what’s possible from a policy standpoint. If you look at data privacy, the laws that have really got teeth are the Californian and European laws. Some of these are to an extent legitimate, even if you’re looking at the right to be forgotten, because if we put KYC data on-chain, who knows if in 10 years there might be the capabilities to decrypt that data, and then it’s out there for anyone to use. So, we as a space need to be innovative to that degree to enable these use cases. But I think it’s really just the last mile, it’s the last 5% that is missing, and we’ll see solutions being drawn up soon that actually solve this.
David: Five years from now, what is decentralized identity going to enable? What are the use cases going to look like?