What is Digital Identity? Frameworks, Risks, and Emerging Solutions

In the past, service providers authenticated individuals when they presented their identity documents, but now they are allowed to authenticate them using their digital identities. It is essential to start with the basics to understand what digital identities are.

In the current world, digital identity is important to getting services in any industry, like finance, healthcare, education, and, more importantly, government. With the current FinTech upsurge and the increased popularity of remote identity verification, financial institutions are becoming more reliant on online sources to onboard and authenticate users. In this domain, digital identity usage has emerged as crucial to security, compliance, and user trust.

What is Digital Identity? & How it Works? 

A digital identity is a distinctive, electronically reproduced collection of attributes and credentials that describe a person, business, or device in an online transaction or electronic transaction. The National Institute of Standards and Technology (NIST) defines it as “the special representation of a subject carried out in an online transaction.” 

These attributes may include biographic data (such as name and birthdate), biometric data (such as fingerprints and facial biometrics ), or digital credentials (such as usernames or cryptographic tokens).

Digital identity serves as the foundation for identifying and authenticating individuals, organizations, or devices in digital interactions. It is essential for secure access to online services, as well as the use of financial platforms or government systems in a secure manner.

Digital identity facilitates global connection and service delivery without requiring the physical presence of the person, unlike physical identity, which involves physical documentation. While often mistaken for merely a username or password, digital identity is a multi-layered profile essential for secure access to digital platforms.

How does Digital Identity Verification Work?

Digital identity verification refers to the verification that a person is an actual and legitimate individual. It enables only authorized persons to access services such as banking, e-commerce, government sites, and healthcare sites. This process is essential for fraud prevention, identity theft, and unauthorized access.

Furthermore, the standard processes used to verify identity include Know Your Customer (KYC) and biometric face matching. The verification process incorporates validation of government-issued documents and two-factor authentication. These methods are employed to verify the attributes of identity and ensure that the person presenting them is genuine.

Moving forward, the verification takes place by one of the two methods: 

• Centralized Verification
• Decentralized Verification 

Centralized vs Decentralized Verification:

Both methods are distinguished from one another, as centralized systems store identity data on a single server or platform, controlled by a single entity. In contrast, decentralized verification distributes control, often utilizing blockchain, and empowers individuals to have greater authority over their data by reducing single-point vulnerabilities.

Private companies and large tech firms now dominate the identity verification ecosystem. These companies offer tools and platforms that integrate facial recognition, along with AI-powered analytics and fraud detection. However, their growing influence raises concerns about data privacy, as well as monopolization and the ethical use of their services.

While digital identity has the potential to promote financial inclusion in a digital-first world, it also risks deepening exclusion. Individuals with low digital literacy or limited access to infrastructure, such as smartphones, internet connectivity, or formal documentation, often face significant barriers to verification. This makes digital identity systems less accessible for marginalized groups, especially in developing regions, and can exacerbate existing inequalities.

Why is Digital Identity Proofing Important?

Digital identity proofing involves the process of determining that a digital identity actually refers to a real and living person. It is more than verification because it also involves ensuring that the person presenting the identity is who it belongs to. This process involves three key stages: 

• Resolution links data points to individuals
• Validation (checking the accuracy of the data)
• Verification (confirming the authenticity of the data).

Among the standard tools, entities using digital identification for verifying access are often referred to as relying parties. These include AI-focused scans of identity documents and fraud prevention programs tuned to detect unusual behaviors. They are designed to detect and prevent the use of fake identities and imitation attempts.

Failures occur when spoofing tools bypass facial recognition or when databases accept manipulated identities. Most systems are not transparent and lack oversight in terms of ethics. These gaps caused issues of algorithmic bias, data misuse, and inadequate controls.

Conclusion 

Digital identity utilizes personal Identifiable information, scans of biometric characteristics, and Internet practices to verify that an individual is who they claim to be. Despite providing numerous advantages, it is riddled with certain problems, such as leaving individuals behind, jeopardizing privacy, and difficulties with regulating the practice.

Solutions to these issues require the provision of clear solutions, ethical data processing, and designs for everyone. Using SSI (Self Soverign Identities) and other forms of decentralized systems, individuals gain greater privacy and access to their information. Users, developers, and even authorities must cooperate and come up with robust digital identity systems where security, access, and trust will be the anchor for individuals throughout the world.